How to Calculate Personal Net Worth and Individual Wealth

When evaluating an investment opportunities, investors often look to the financial records of companies to observe trends, opportunities, and signals that tell them whether an investment is wise or should be avoided for alternatives that are more profitable. One of the financial records examined is the balance sheet. The balance sheet is an accounting of the firm’s investment and financing decisions. When subtracted from one another, an investor arrives at an accurate representation of what the company and, consequently, the owners of the company are worth as a result of the managers’ decisions.

The same logic can be used to calculate your own personal net worth. Such a calculation includes considering your assets, debt liabilities, and future earnings. Read on to learn how to calculate your personal net worth and your individual wealth.

Assets found on left hand side of an accounting balance sheet represent the investment decisions of a firm’s managers. This side includes cash, machinery, land, plant, equipment and anything else of value owned by the company. The right hand side of the balance sheet includes both liabilities and owner’s equity. Liabilities are anything that the company owes such as long-term debt, short-term debt, notes, and unearned revenue.

Included on the right side of the balance sheet is the owner’s equity or a calculation of what the company is worth. This value also represents the value to the company’s owners, typically the stockholders of a corporation. These two sides of a balance sheet give rise to the balance sheet identity. As its name implies, everything on the left side of balance sheet must equal everything on the right side. The balance sheet identity is given as:

Assets = Liabilities + Owner’s Equity

At first glance, the balance sheet identity does not make intuitive sense. However, doing some simple algebra, we can rearrange the identity to look like this:

Owner’s Equity = Assets – Liabilities

Now the identity makes more sense. It states that what a company is worth (owner’s equity) is its assets minus its liabilities; the company’s worth is determined by removing from its assets what it owes in debt. This basic identity is the foundation for calculating personal net worth.

To calculate your net worth, first you must make a list of all your assets. This includes your house, car, cash, furniture, investments, television, IRA, and anything else of value that would significantly increase your net worth. Then you make a list of everything you owe including mortgage payments, credit card debt, loans and, again, anything that would significantly alter your net worth. By simply subtracting your assets from your liabilities, you will arrive at an estimate of your net worth.