Understanding your financial worth is a crucial component in managing your personal finances. The total value of your physical assets, or your tangible net worth, is a key measure of this. By comprehending and calculating it effectively, you can make informed decisions related to investments, debt management and future financial planning. Here’s what you need to know.
A financial advisor can help you get a clear breakdown of your net worth to manage your finances effectively.
What Is Your Tangible Net Worth?
Tangible net worth is a financial metric that represents the value of an individual’s (or company’s) assets minus its liabilities. This excludes intangible assets (see examples in the section below).
In other words, it measures the net value of your (or a company’s) physical or tangible assets that could be liquidated to cover debts. Tangible net worth can be used to get valuable insight on your (or a company’s) financial health and the ability to withstand financial challenges.
Tangible net worth is particularly relevant in industries where physical assets play a significant role, such as manufacturing or real estate.
Lenders and investors use this metric to assess the collateral value available to cover debts, providing insights into the risk associated with lending or investing in a company.
A higher tangible net worth generally indicates a more robust financial position and greater capacity to weather financial challenges.
Tangible vs. Intangible Assets
Tangible assets, like buildings, machinery, equipment, inventory and cash, are physical and measurable, used in daily life or a company’s operations.
Intangible assets, on the other hand, can’t be physically touched or seen even though they hold value. These include patents, copyrights, trademarks, goodwill, and brand recognition.
You should keep in mind that tangible assets are often considered safer to rely on for assessing your financial health because of their stability, while the value of intangible assets can fluctuate significantly.
How to Calculate Your Tangible Net Worth
The process of calculating your tangible net worth involves listing all your tangible assets–real estate, vehicles, cash and investments like stocks and bonds–and their current value. You then take that value and deduct all of your liabilities–mortgages, loans (student, personal, car) and credit card balances–from it to get your tangible net worth.
For example, if you have a home valued at $200,000, you would deduct all debts from this tangible asset to get its value. This would then get added with other tangible assets to estimate your tangible net worth.
You can calculate you tangible net worth with this formula:
Tangible Net Worth = Total Assets – Total Liabilities – Intangible Assets
Take note: Intangible assets, as described in the section above, are excluded from the calculation of Tangible Net Worth.
Example of a Tangible Net Worth
To calculate your tangible net worth, let’s use this financial breakdown for an individual as an example below:
- Cash and Savings Accounts: $10,000
- Retirement Accounts (401(k), IRA): $50,000
- Investments (Stocks, Bonds): $30,000
- Personal Residence (Market Value): $300,000
- Mortgage on Personal Residence: $200,000
- Car (Market Value): $15,000
- Car Loan: $5,000
- Jewelry and Collectibles: $5,000
To calculate the tangible net worth, first add up all tangible assets:
- Cash and Savings Accounts: $10,000
- Personal Residence (Market Value): $300,000
- Car (Market Value): $15,000
Total Tangible Assets = $10,000 + $50,000 + $30,000 + $300,000 + $15,000 + $5,000 = $410,000
Then, add up all liabilities related to tangible assets:
- Mortgage on Personal Residence: $200,000
- Car Loan: $5,000
Now, calculate the total tangible liabilities = $200,000 + $5,000 = $205,000
Then, calculate the tangible net worth using the formula:
Tangible Net Worth = Total Tangible Assets – Total Tangible Liabilities
Tangible Net Worth = $325,000 – $205,000 = $120,000
In this example, Alex’s Tangible Net Worth is $120,000. This represents the net value for an individual’s tangible assets (cash, personal residence, car) after subtracting his tangible liabilities (mortgage, car loan).
For a comparison, here’s an example to calculate the tangible net worth of a business. Let’s say you own a manufacturing company that produces furniture. Your company’s financial information is as follows:
Total Assets: $1,500,000
- Cash: $100,000
- Inventory (raw materials, finished products): $400,000
- Land and Buildings: $800,000
- Machinery and Equipment: $200,000
Total Liabilities: $800,000
- Bank Loan: $500,000
- Accounts Payable: $300,000
Intangible Assets: $50,000
- Trademarks and Patents: $30,000
- Goodwill: $20,000
To calculate Tangible Net Worth:
Tangible Net Worth = Total Assets – Total Liabilities – Intangible Assets
Tangible Net Worth = ($1,500,000) – ($800,000) – ($50,000)
Tangible Net Worth = $650,000
In this example, the tangible net worth of the manufacturing company is $650,000. This represents the net value of the company’s physical assets that can be used to cover its liabilities, excluding intangible assets like trademarks, patents, and goodwill.
Bottom Line
Understanding and calculating tangible net worth is an important step in assessing your financial health. Keep in mind that this metric provides a snapshot of the company’s financial position at a given point in time. It’s important to periodically calculate and analyze your tangible net worth to assess your (or a company’s) financial health as it changes over time.
Tips for Increasing Net Worth
- Working with a financial advisor can be a smart way to increase your net worth. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Another way to improve your net worth can be to keep your investment costs low. Choosing the right investments can help. For instance, exchange-traded funds (ETF) or index funds may offer lower expense ratios when compared with actively managed mutual funds. You can also save on investment costs by choosing an online brokerage that offers commission-free trades on stocks and ETFs.
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