Do you know how much your assets are really worth? If you only look at the market value of your tangible assets, such as your house, car, or jewelry, you might be missing out on a more accurate picture of your financial health. That’s because there are other factors that affect the value of what you own, such as depreciation, intangible assets, and liabilities. To get a better understanding of your true net worth, you need to adjust it for these factors.
Adjusted net worth is a measure of financial health that considers the value of all assets and liabilities, both tangible and intangible. It is often used in business valuation, but it can also be applied to personal finance. By calculating and tracking your adjusted net worth, you can gain more insight into your financial status, make smarter decisions, and achieve your financial goals.
In this article, we will explain what adjusted net worth is, why it is important, how to calculate it, and how to track it with Kubera, a comprehensive tool for managing your wealth.
What is Adjusted Net Worth?
You may have heard of net worth, which is the difference between your total assets and your total liabilities. Assets are anything that you own that has value, such as your house, car, bank accounts, stocks, etc. Liabilities are anything that you owe, such as your mortgage, credit card debt, student loans, etc.
To calculate your net worth, you simply add up the value of all your assets and subtract the value of all your liabilities. For example, if you have $500,000 in assets and $200,000 in liabilities, your net worth is $300,000.
However, this simple calculation may not reflect the true value of your assets, because some of them may lose value over time, or may not have a clear market value. For example, your car may depreciate as it gets older, or your patent may not be worth anything unless you sell it or license it. Similarly, some of your liabilities may not affect your current cash flow, but may have a future impact on your net worth. For example, you may have a long-term contract that requires you to pay a certain amount in the future, or a contingent liability that depends on the outcome of a lawsuit or a warranty claim.
To account for these factors, you need to adjust your net worth by adding or subtracting the value of your intangible assets and liabilities, as well as the depreciation and unrealized gains or losses of your tangible assets. This will give you a more accurate picture of your financial health, as it reflects the potential value or cost of your assets and liabilities.
Adjusted net worth changes as your assets and liabilities fluctuate and grow over time, so it is important to track it on a regular basis to understand and manage your financial health. By tracking your adjusted net worth, you can see how your wealth is affected by your income, expenses, investments, debts, and other financial events.
Understanding Tangible vs. Intangible Assets and Liabilities
To calculate your adjusted net worth, you need to understand the difference between tangible and intangible assets and liabilities. Tangible assets are those that you can see and touch, such as your house, car, jewelry, etc. Intangible assets are those that you can’t touch, but have value, such as your patents, trademarks, copyrights, intellectual property, and assets located in accounts (stocks, crypto, and even cash).
Tangible assets are usually easier to value, as they have a clear market price or a historical cost. However, some of them may depreciate over time, meaning that they lose value as they get older, wear out, or become obsolete. For example, your car may lose value as you drive it, or your computer may lose value as new technology emerges. To adjust your net worth for depreciation, you need to subtract the amount of value that your tangible assets have lost since you acquired them.
Intangible assets are usually harder to value, as they may not have a clear market price or a historical cost. Some of them may have a high potential value, but only if you sell them or use them to generate income. For example, your patent may be worth a lot if you license it to a company or sue someone for infringing it, but it may not have any value if you don’t do anything with it. To adjust your net worth for intangible assets, you need to subtract the value of your intangible assets from your total assets, unless you have a reliable way to estimate their value.
Similarly, liabilities can be tangible or intangible, depending on whether they affect your current or future cash flow. Tangible liabilities are those that you have to pay now or in the near future, such as your mortgage, credit card debt, student loans, etc. Intangible liabilities are those that you may have to pay in the future, depending on certain conditions or events, such as a long-term contract, a contingent liability, or a deferred tax liability.
Tangible liabilities are usually easier to measure, as they have a clear amount and a due date. However, some of them may have a variable interest rate, meaning that the amount you have to pay may change over time. For example, your credit card debt may increase as the interest rate goes up, or your mortgage may decrease as the interest rate goes down. To adjust your net worth for variable interest rates, you need to use the current interest rate to calculate the present value of your future payments.
Intangible liabilities are usually harder to measure, as they may not have a clear amount or a due date. Some of them may never materialize, but they still pose a risk to your net worth. For example, you may have a long-term contract that requires you to pay a certain amount in the future, but you may be able to cancel it or renegotiate it. Or, you may have a contingent liability that depends on the outcome of a lawsuit or a warranty claim, but you may be able to settle it or avoid it. To adjust your net worth for intangible liabilities, you need to estimate the probability and the amount of your future payments, and use a discount rate to calculate their present value.
Why is Adjusted Net Worth Important?
The importance of adjusted net worth lies in its ability to provide a more precise overview of your financial status. For instance, if you possess substantial debt but also own a valuable home, your net worth without adjustment might appear really high and lead you to make less-than-smart spending decisions. By adjusting your net worth for depreciation, intangible assets and liabilities, and unrealized gains or losses, you can get a better sense of how much your assets are really worth, and how much you owe or may owe in the future.
This can help you make more informed decisions in various areas of your personal finance, such as:
- Resource allocation: By knowing your adjusted net worth, you can allocate your resources more efficiently and effectively. For example, you can decide how much to save, spend, invest, or donate, based on your financial goals and priorities. You can also decide how to diversify your assets and liabilities, to reduce your risk and increase your return.
- Investment: By knowing your adjusted net worth, you can evaluate your investment performance and strategy. For example, you can compare your adjusted net worth with your initial investment, to see how much you have gained or lost over time. You can also compare your adjusted net worth with your expected return, to see if you are on track to achieve your financial goals. You can also adjust your investment portfolio, to take advantage of new opportunities or avoid potential losses.
- Risk management: By knowing your adjusted net worth, you can assess your risk exposure and tolerance. For example, you can see how much of your net worth is tied to volatile or illiquid assets, such as stocks, crypto, or real estate, and how much of your net worth is subject to future liabilities, such as contracts, lawsuits, or taxes. You can also see how much of your net worth is protected by insurance, savings, or other safety nets. You can then decide how to manage your risk, by hedging, diversifying, or reducing your exposure.
- Diversification: By knowing your adjusted net worth, you can diversify your assets and liabilities more effectively. Diversification is the practice of spreading your wealth across different types of assets and liabilities, to reduce your risk and increase your return. For example, you can diversify your assets by investing in different sectors, markets, countries, or currencies, to reduce the impact of market fluctuations, inflation, or currency exchange rates. You can also diversify your liabilities by using different sources of financing, such as loans, leases, or equity, to reduce the cost of borrowing, the risk of default, or the loss of control.
Important Components of Adjusted Net Worth
To calculate your adjusted net worth, you need to consider the following components:
- Total assets: This is the sum of all your tangible and intangible assets, such as your house, car, bank accounts, stocks, patents, etc. You can use the market value or the historical cost of your assets, depending on the availability and reliability of the data. You can also use the net book value of your assets, which is the historical cost minus the accumulated depreciation. Here's a detailed guide on how to calculate total assets.
- Total liabilities: This is the sum of all your tangible and intangible liabilities, such as your mortgage, credit card debt, student loans, contracts, contingent liabilities, etc. You can use the current amount or the present value of your liabilities, depending on the interest rate and the due date. You can also use the net present value of your liabilities, which is the present value minus the interest expense.
- Depreciation: This is the amount of value that your tangible assets have lost over time, due to wear and tear, obsolescence, or market conditions. Depreciation reduces the value of your assets, and thus your net worth. To calculate depreciation, you can use various methods, such as the straight-line method, the declining balance method, or the units of production method. The method you choose depends on the type and nature of your asset, and the accounting standards you follow. To adjust your net worth for depreciation, you need to subtract the depreciation expense from the historical cost or the market value of your assets.
- Unrealized capital gains and losses: These are the changes in the value of your assets that have not been realized through a sale or a transaction. A capital gain occurs when the current price of an asset surpasses the initial investment, while a capital loss occurs when the current price of an asset falls below the initial investment. Unrealized capital gains and losses affect the value of your assets, and thus your net worth. To calculate unrealized capital gains and losses, you need to compare the current price of your assets with the initial investment or the book value. To adjust your net worth for unrealized capital gains and losses, you need to add the unrealized capital gains or subtract the unrealized capital losses from the market value or the book value of your assets.
How to Calculate & Track Adjusted Net Worth with Kubera
Now that you know the components of adjusted net worth, here's a quick guide on how to use Kubera to calculate and track your adjusted net worth.
Step 1: Initial Net Worth Calculation
- Begin by computing your preliminary net worth: Sum up all your assets and then deduct your total liabilities. This gives you a basic net value of your assets. However, to accurately reflect the true worth of your portfolio, further adjustments are necessary. For a detailed guide, visit Kubera's Statement of Net Worth.
Step 2: Making Key Adjustments
- Addressing Intangible Assets: If your portfolio includes significant intangible assets like patents and trademarks, subtract their value from your total assets. This is a vital step as these assets might not have a substantial market value.
- Accounting for Depreciating Assets: For portfolios with a substantial number of assets that depreciate (such as vehicles, real estate, etc.), it's important to adjust your net worth by reducing the value these assets have lost since their purchase.
- Considering Intangible Liabilities: In cases where you have significant intangible or future liabilities (like pending debts or anticipated expenses), adjust your net worth to reflect these potential financial obligations.
Step 3: Tracking and Managing Your Portfolio
- Once you've calculated your assets, liabilities, and adjusted net worth, the next step is to monitor and manage your portfolio over time. This helps you gain insights into your portfolio's performance, set realistic financial goals, forecast income and expenses, diversify effectively, and continue growing your wealth.
- While tracking manually is an option, it can be cumbersome, time-intensive, tedious and prone to inaccuracies especially if you have a lot of assets and liabilities, or if they change frequently. For a more efficient approach, consider setting up a real-time net worth tracker and investment dashboard with Kubera. Learn how to do this at Kubera's Investment Dashboard.
Adjusted net worth = Total assets − Total liabilities − Depreciation − Intangible assets − Intangible liabilities + Unrealized capital gains − Unrealized capital losses.
To illustrate, let’s use a hypothetical example. Suppose you have the following assets and liabilities pulled from your Kubera portfolio:
To calculate your adjusted net worth, you need to make the following adjustments:
- Depreciation: Assume that your house depreciates by 2% per year, and your car depreciates by 15% per year. Then, the depreciation expense for your house is $500,000 x 0.02 = $10,000, and the depreciation expense for your car is $20,000 x 0.15 = $3,000. The total depreciation is $10,000 + $3,000 = $13,000.
- Intangible assets: Assume that your patent has no market value, unless you sell it or license it. Then, the value of your intangible asset is $100,000.
- Intangible liabilities: Assume that your contract requires you to pay $50,000 in five years, and your contingent liability has a 50% chance of materializing into a $20,000 payment in one year. Then, using a 10% discount rate, the present value of your contract is $50,000 / (1 + 0.1)^5 = $31,037, and the present value of your contingent liability is $20,000 x 0.5 / (1 + 0.1) = $9,091. The total value of your intangible liabilities is $31,037 + $9,091 = $40,128.
- Unrealized capital gains and losses: Assume that the current price of your stocks is $60,000, and your initial investment was $40,000. Then, you have an unrealized capital gain of $60,000 - $40,000 = $20,000.
Using the formula, your adjusted net worth is calculated as follows:
Adjusted net worth = (500,000 + 20,000 + 10,000 + 50,000 + 100,000) − (300,000 + 10,000 + 5,000 + 50,000 + 20,000) − 13,000 − 100,000 − 40,128 + 20,000 − 0;
i.e., Adjusted net worth=680,000−385,000−133,128 = 161,872
As you can see, the adjusted net worth ($161,872) is much lower than your simple net worth, which is $300,000. This is because you have a lot of intangible assets and liabilities, as well as depreciation and unrealized gains, that affect the value of your portfolio.
Track, Manage, & Grow Your Wealth with Kubera
Kubera is a comprehensive tool and a personal balance sheet for tracking and managing your net worth. With Kubera, you can:
- Monitor and measure your investments over time, across different types of assets and liabilities, such as stocks, crypto, real estate, loans, etc.
- Track tangible and intangible assets, such as patents, trademarks, intellectual property, etc., and assign them a value based on your own estimation or a third-party valuation.
- Track multiple currencies, digital investments, crypto, and more, and convert them to your base currency using the latest exchange rates.
- Adjust your net worth for depreciation, intangible assets and liabilities, and unrealized gains and losses, using various methods and parameters.
- Create a dashboard that shows your net worth, asset allocation, portfolio performance, and other key metrics, in a clear and visual way.
- Make smarter decisions, by allocating your resources, evaluating your investments, managing your risks, and diversifying your portfolio, based on your financial goals and priorities.
- Set up alerts and notifications, to keep you updated on your net worth changes, or major movements.
- Simulate future financial scenarios based on their current assets, investments, and savings to visualize how your net worth might evolve over time, and make more informed financial decisions, setting realistic savings goals, and adapting investment strategies to future expectations.
- Secure your financial files and data with bank grade encryption, and set up beneficiary management features, to protect your legacy.
Ready to take control of your wealth? Sign up for a trial today and see how Kubera can help you track, manage, and grow your wealth.
