Thursday, September 13, 2012
What is net worth
Henry whose has jaguar cannot claim that he is richer than Smith whose has no Jaguar. We should calculate the net worth of the jaguar owner and the people whose has no jaguar. Henry lease the Jaguar to a car company for five years. Henry has no right to sell the jaguar unless he settle the lease.
Henry is a manager in a good company that produce microchip. He has one house in the urban area that price is $ 50,000. Henry got much paycchek from the company. He get at least $ 10,000 each month. Henry also save money for his emergency fund. He realizes that he will need when he got sick. He has cash $ 60,000 in various assets such as mutual fund, cash, and other. Henry invest the money to stock market that the value reach a million dollar. He diversifies the investment into various investment such as stock, bond, mutual fund and others.
On the other hand, Smith is a freelancers. He just work when someone need his service. Smith is a financial consulting and blogger. The clients just pay him $ 2,000 a month. Smith receive money lesser than Henry. He just has Honda car that price is only $5,000. Smith is a low profile man. He has no credit card and he has no debt to other people. He buy the small house cash.
Smith also has business. He found a printing company. They serve some company and print some book. He also saves the money to the stock market and he has $ 50,000 gold.
To compute the net worth, you have to sum of all the asset. Then sub it with the liabilities. Sum the Henry's asset house $ 50,000, emergency fund $ 60,000, and $ 10,000 investment equals $120,000 assets. Sum the Smith's assets Honda car, $5000; gold $, 50,000; $ house, $ 25,000, investment; 30,000, in the printing company equals $ 85,000 equals $195,000. Smith has no debt so the net worth is equals $195,000. Meanwhile henry has debt that he should pay $20,000. The net worth is total asset $120,000 minus total liability $20,000 equals $ 100,000.
The Smith net worth is higher than the Henry. Smith is richer than Henry. Smith prefer to live blow the mean. He are not tempted to buy jaguar though he can buy it. People may respect Henry than smith due its car but smith is still the richer.