Introduction to Net Worth for Kids & Adults

NET WORTH:

Net worth is a measure of how rich or wealthy a person is. It shows the total value of everything they own after subtracting what they owe. It's like adding up all the things you have and taking away any money you owe to others.

In simple terms, it's like calculating the total value of all your belongings after removing your debts.

The formula of calculating the Net worth is:

Net Worth = Total Value of Assets - Total Value of Liabilities

Let's break down the formula using layman's language:

Total Value of Assets: This includes everything you own that has value. It can be your savings in bank accounts, investments, property (like a house or land), vehicles (such as cars or motorcycles), jewellery, electronics, and any other valuable possessions you have.

Total Value of Liabilities: This refers to your debts or what you owe to others. It can include home loans, car loans, credit card debt, personal loans, or any other money you borrowed.

To calculate your net worth, you simply subtract the total value of your liabilities from the total value of your assets. The result will be your net worth, which indicates how much wealth you possess after considering your debts.

To understand net worth better, let's break it down with an example:

1. Imagine you have a piggy bank, a bicycle, and a toy collection. Your piggy bank has Rs. 500, your bicycle is worth Rs. 5,000, and your toy collection is valued at Rs. 2,000. These are the things you own, and together they are worth Rs. 7,500.Now, let's say you borrowed Rs. 2,000 from a friend, and you have to repay it. This is your debt.To calculate your net worth, you subtract your debt from the total value of your belongings. In this case, your net worth would be Rs. 5,500 (Rs. 7,500 - Rs. 2,000). It means that, after considering your debt, you are worth Rs. 5,500.

2. Imagine you have 5 chocolates (each worth Rs. 10) and you owe your friend Rs. 15. Your net worth would be -Rs. 5 because you have 5 chocolates worth Rs. 10 each (5 x 10 = Rs. 50), but you owe Rs. 15.

3. Let's say you have 3 toys (each worth Rs. 50) and Rs. 100 in your piggy bank. You don't owe anyone anything. In this case, your net worth would be Rs. 250 because you add the value of your toys (3 x 50 = Rs. 150) and the money in your piggy bank (Rs. 100).

4. You have a collection of stickers worth Rs. 20, but you borrowed Rs. 10 from your sibling. Your net worth would be Rs. 10 because you have stickers worth Rs. 20, but you owe Rs. 10.

Net worth can also be calculated for bigger things, like a house or a car, or for more complex situations, such as business assets and liabilities.

For adults, net worth includes all the valuable possessions they own, such as property, investments, savings in bank accounts, and even businesses. It also takes into account any outstanding loans or debts they have.

1. For example, let's say you own a house worth Rs. 50 lakhs, you have Rs. 10 lakhs in your bank accounts, and you own a small business valued at Rs. 30 lakhs. On the other hand, you have a home loan of Rs. 20 lakhs. In this case, your net worth would be Rs. 70 lakhs (Rs. 50 lakhs + Rs. 10 lakhs + Rs. 30 lakhs - Rs. 20 lakhs).

2. Suppose you have a house worth Rs. 50 lakhs and a car worth Rs. 10 lakhs. Additionally, you have Rs. 20 lakhs in your bank account, but you still owe Rs. 5 lakhs on your home loan. Your net worth would be Rs. 75 lakhs because you add the value of your house, car, and bank account (50 + 10 + 20 = Rs. 80 lakhs) and subtract the amount you owe (Rs. 5 lakhs).

3. Let's say you have investments worth Rs. 30 lakhs, savings of Rs. 10 lakhs, and no debts. Your net worth would be Rs. 40 lakhs because you add the value of your investments and savings together.

4. Consider someone who has a laptop worth Rs. 50,000, a smartphone worth Rs. 30,000, and Rs. 10,000 in cash. However, they have a credit card debt of Rs. 20,000. In this case, their net worth would be Rs. 70,000 because you add the value of their possessions and cash (50,000 + 30,000 + 10,000 = Rs. 90,000) and subtract the credit card debt (Rs. 20,000).

Your Net Worth can get changed over time as the value of your properties changes or when you payoff your loans. It serves as a useful indicator of your financial standing and can help you track your progress towards building wealth and achieving your financial goals.