What Exactly Does “Person X’s Net Worth is $$$” Mean?

Many of us catch the Forbes list every year, where we see people like Rihanna's net worth listed at $600 million or Dwayne Johnson (aka The Rock) net worth listed at $280 million. More recently, Forbes reported that Amazon founder Jeff Bezos, the wealthiest man in the world, net worth is at an astonishing $181 billion. His current net worth means that he is worth more than Nike, McDonald's, Costco, and almost 50 percent of the Dow Jones stock market index. Are you thinking what we're thinking? Yes, that is a lot of money.


Now, let us explain. Although Jeff Bezos's net worth is $181B, that does not mean that he can go to the bank and actually withdraw 181 billion dollars.


Why?


Your net worth is calculated by the calculation of all your assets (what you own) minus your liabilities (what you owe), also known as your debt.


Your assets could include any of the following:

· Home

· Automobile

· Retirement Accounts

· Investments

· Checking & Savings Account Balances

· Insurance policies


Your liabilities could include any of the following:

· Mortgage

· Auto loan

· Credit cards

· Student loans


What is net worth?

Your net worth can either be positive or negative. Having a positive net worth means that your assets exceed your liabilities. Negative net worth would imply that your liabilities exceed your assets. The goal is to make sure that your net worth is positive and increasing over time. Positive net worth gives a strong indication that your financial health is in good condition. If your net worth is decreasing, it may prompt concern that your financial health is in jeopardy.


The best way to improve your net worth is to either reduce liabilities while your assets remain constant or increase your assets while the liabilities either stay steady or fall.


High Net Worth Individuals (HNWI)

We usually hear and talk about net worth only when it comes to high net worth individuals (HNW) we see in the media, such as on the Forbes list. However, we all have a net worth. The difference is that we seem to think about net worth differently when it comes to HNW individuals. These individuals will typically have a net worth that exceeds $1M in liquid assets.


A liquid asset is a type of asset that can expeditiously be converted into cash while keeping its market value. There are also non-cash liquid assets such as stocks or treasury bonds that are considered equivalent to cash.


Below are a few factors that make assets more or less liquid:

- How established the market is at the time

- How easy it is the transfer ownership of the asset

- How long it takes an asset to be sold (liquidated)


With this being said, cash on hand is the most liquid type of asset you can have, followed by funds you can withdraw from either your checking or savings accounts.

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