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Net worth

Lesson in Course: Investing basics (beginner, 6min)

Nicolas Cage is an award-winning Hollywood actor. What are some financial decisions that cause the biggest stars to fall?

Eureka!

What it's about: Net worth is a measure of how wealthy a person is.

Why it's important: Building wealth leads to financial security.

Key takeaway: Keep track of net worth over time. It will let us know if our financial decisions are making us wealthier.

This is what it feels like to make good financial decisions

In one of his most prominent roles, Nicolas Cage stole the Declaration of Independence as Benjamin Gates in National Treasure. At the peak of his acting career, he was one of the highest-paid actors, making $20 million for starring in movies, and had amassed a net worth of $150 million; however, that wealth did not last long.

How do we know how wealthy we are?

One way of measuring someone's wealth is by looking at their net worth.

What is Net worth?

A measure of wealth determined by taking the difference between what we own and what we owe.

We build up our net worth by increasing how much we own and/or decreasing how much we owe. Cage's net worth of $150 million meant that the value of the things he possessed was $150 million more than what he owed. If we owe more than we own, our net worth will be negative.

Goal progress

Knowing our net worth gives us a snapshot of our financial circumstances, allowing us to set more realistic investment goals. Tracking changes over time will tell us if we are making sound investment decisions and progressing toward our financial goals.

Well informed decisions increases the chances of achieving our goals

Doing all this can prevent us from making mistakes, like spending or borrowing too much, that could eventually lead to bankruptcy or financial ruin.

What do we own?

Figuring out our net worth starts by tallying up our assets, what we own.

What is Asset?

Resources that we own that produce value.

These are our possessions that have value. Some examples would be our homes, cars, cash, savings accounts, and any investments.

What do we owe?

The next step is to subtract our liabilities, or what we owe.

What is Liability?

Obligations that we owe and need to pay back in the future.

These are debts we need to pay back. The mortgage we took out to buy our home, the car loan we needed to purchase that ride, and the credit card debt we racked up eating out at restaurants are all examples of our liabilities.

How to find our net worth
 

Paper wealth

Let's look at some of the wealthiest people in the world, the billionaires. Someone like Jeff Bezos, the founder of Amazon, had a growing net worth above $180 BILLION at the end of 2020, over 1,000 times richer than Nicolas Cage was at his peak.

Paper wealth isn't liquid like cash

There is no way Bezos had $180 billion in cash on hand. Most of his wealth was tied to the 55.5 million shares of Amazon stock he owned. This means his net worth moves up and down with the stock price. 

What is Paper wealth?

Net worth that comes from the value of priced assets, like stocks.

 
Going from hero to zero

Overspending & overborrowing

With his high net worth, Cage lived a life of extravagance. He bought some bizarre things like a nine-foot burial tomb, an octopus, the first Superman comic, shrunken pygmy heads, and a 70-million-year-old dinosaur skull. 

As odd as some of these items are, what led to Cage’s financial demise was how he casually bought a private island in the Bahamas, a couple of castles in Europe, a dozen mansions and estates across the US, and 22 cars. On top of that, he owed millions of dollars from income and real estate taxes. Cage has been taking on as many film roles as he can to pay off his debts.

A common misconception is that having a high income or having nice things makes a person wealthy. Spending all of the money we make doesn't leave room to build wealth with. Plus, what if we buy those things by borrowing all of the money to pay for them?

Overspending and underinvesting can lead to bad outcomes

It doesn’t help to own lots of expensive stuff if we owe lots of money. In fact, our net worth usually goes down if we take on large amounts of debt because of interest, the cost of borrowing. 

Net worth applies to companies as well

The principles of net worth that we use for personal finance operate the same way for companies. When looking for good companies to invest in, consider the assets and liabilities on their balance sheet. Do they own a lot of valuable assets? Have they borrowed a lot of money and therefore owe a lot? 

Companies that have significantly more assets than liabilities are more financially stable, making them attractive investments.

Actionable ideas

There are many unfortunate examples of athletes, celebrities, and investors who went from being fabulously rich to desperately broke because they mismanaged their wealth. 

Keeping track of your net worth over time will keep you on track to reach your goals and make sound investment decisions. In addition, it gives you feedback about your financial security and if you are becoming wealthier.

 

Supplementary material

Watch this video to walk through calculating net worth
https://youtu.be/KhSnNtdYR9Y

Glossary

What is Net worth?

A measure of wealth determined by taking the difference between what we own and what we owe, assets minus liabilities.

What is Asset?

Resources that we own that produce value.

What is Liability?

Obligations that we owe and need to pay back in the future.

What is Paper wealth?

Net worth that comes from the value of priced assets, like stocks.