The Simplest Possible Net Worth Definition

by Ryan

The definition of net worth has been debated and you’ll often find many answers as you search for the meaning of net worth. The standard answer for net worth goes something like this:

“Assets – Liabilities = Net Worth”

The struggle comes in describing what an asset is and what true liabilities are. Is a house an asset, or liability, is a business an asset? How do you calculate the actual value?

Some even argue that cash is the only true asset because it’s the only thing you can rely on at any given money. That is, of course, if the economy itself holds up. If you may recall (or at least recall in images) during the great recession a wheelbarrow of money wasn’t enough to buy a loaf of bread because of massive inflation.

Although the definition of net worth is fairly straight forward from a mathematical perspective, there’s one definition that I really like because it sums up what’s really behind your net worth.

Net Worth Without the Numbers

Although this may seem a bit like fluff one of the best definitions of net worth I’ve ever come across was simply this:

“What Value You’ve Provided to Society – What You’ve Consumed from Society”

Money flows to value and opportunity. Through free markets supply and demand naturally dictate prices (although sales ability helps). Likewise what you’ve taken from society should be less than what you’ve given from society.

If you have a lot of knowledge, and you leave it in your head, you haven’t provided any value to society. However, the more people you help, the more you typically make. This of course, if over simplified but the principles remain constant.

The more people you help by providing solutions to their problems or adding comfort to their lives the more value you’ve provided to society, which then means the more money you’ll often make.

Are Some American’s Not Valuable?

The funny thing about a definition like the one above is that you begin to realize that there are many people with a negative net worth in America. Does this mean that they provide less value than they consume?

The simple answer could be yes, or this may also mean that they aren’t good at negotiating their true value or showing the public what they’re worth by doing menial tasks or jobs that aren’t in line with their abilities.

What we can learn from the simplest definition of net worth is that if you want to increase your net worth, add more value to society, decrease what you take from society, or do a combination of both.

Based on the simple definition of net worth are you giving more value to society than you’re taking?

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{ 6 comments… read them below or add one }

Delena Silverfox March 15, 2011 at 7:18 am

Hmm. I can understand the debate.

According to Robert Kiyosaki, an asset makes you money, period. So a house that is your home would be a liability (since you pay mortgage, property tax, electricity, etc), but a house that is your rental property *would* be an asset since you collect rent from a tenant and –if you did your due diligence– would be profitable. The same goes for any property you own.

He also says net worth is assets – liabilities.

If we have people who have negative net worth, I think it’s more a sign of a severe lack of financial education beyond the common and lower-class education of “go to school, get good grades, and get a good job.” If it’s the business owners, investors, and entrepreneurs who are making money, this is a sure sign that most employees are not going to have the chance to know how it feels to have positive net worth.

Deena
Delena Silverfox´s last blog post ..epc Belfast

John Raleigh March 20, 2011 at 4:11 pm

If you take into account the number of people who are living in extreme debt nowadays will you go as far as saying that they are ‘worthless’ ? I agree with what you said above, but isn’t there more to a person’s worth than just his financial standing? I mean some people are really intelligent and put their services at society’s disposal and yet they do it strictly on a voluntary basis- free of charge. How do you calculate the worth of those people then?
John Raleigh´s last blog post ..How To Get A UTR Number If You Are Self Employed

Daniel Black March 20, 2011 at 4:18 pm

If I got this whole debate right, what happens that when your assets are losing value? Let’s say for instance you have a house, and you got a job. The economy is facing rocky times and despite the fact that you still have your job, in real terms you salary is losing value (inflation for instance coming in) and the value of your asset as well is taking a real blow since the housing market is bearish, what happens of your net worth? don’t you think it’s more appropriate to talk about a ‘real’ as opposed to ‘nominal’ worth?

Keith Dennis April 1, 2011 at 4:41 pm

Hi Ryan,

That is an interesting definition to think about. I think I agree with it the more I think about it. The wealthiest people in the world have provided great value to the people around them by creating jobs and opportunities. The more value, the greater the wealth.

As far as people not being valuable. People are valuable in different ways and at the very least, from a money only perspective, employees that are negative net worth are contributing to their employers net worth. That is along with keeping employers in business and helping do their part to provide jobs!

Keith
Keith Dennis´s last blog post ..How To Increase Your Rates With Annuity Laddering – No More Interest Rate Shopping!

harvestwages May 12, 2011 at 9:48 am

Hello Ryan,
Just been long without stopping by. I see great updates.
harvestwages´s last blog post ..Home Based Business – 5 Tips For Moms

Financial Samurai May 27, 2011 at 9:33 pm

Hey Ryan! How’s life? What’s the latest with what you’ve been up to and stuff?

I’m finishing up a vacation in Hawaii and thought of you. Went snorkeling off the noratorium and saw some fishies.

Best, Sam
Financial Samurai´s last blog post ..To Conform Or Not To Conform- Your Life Is Your Own

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