Net worth featured prominently during the vetting of Cabinet Secretary nominees led by National Assembly Speaker Moses Wetangula.

Five nominees declared cumulative net worth of Ksh2.5 billion on August 1 when the exercise kicked off, sparking debate among Kenyans.

Education CS nominee Julius Migos said he was worth Ksh790 million, Kithure Kindiki (Interior) Ksh694, Deborah Barasa (Health) 455 million, Alice Wahome (Lands) 327 and Soipan Tuya (Defence) 243 million. 

But what exactly is net worth and how do you calculate it? Does it even matter to know your net worth? 

Understanding net worth

Net worth is the value of assets an individual or corporation owns after deducting the liabilities they owe. In simpler terms, it is what’s left after selling all assets and paying off personal debt.

Assets include valuable possessions like cash, retirement and investment, savings, vehicles, real estate, your house, and anything else that you could sell for cash.

Personal belongings, such as clothes and furniture, are typically not included as assets, as they are not sold in case of bankruptcy or liquidation.

Liabilities, on the other hand, are financial debts that you’re responsible for, which can drain your net worth.

They include loans, accounts payable (AP), mortgages, credit card debt, student loans, bills and anything else you owe money on.

Also to note, when calculating liabilities, take the repayments that are currently outstanding – not something that will be due in the near future.

If a person or company owns assets that are greater than liabilities, it is said to show a positive net worth.

Net worth can be described as either positive or negative. Negative net worth indicates that liabilities exceed assets while positive net worth means that assets are greater than the liabilities.

A positive net worth is associated with good financial health, whereas negative net worth can be perceived as a negative signal and shows the inability to settle liabilities.

The best way to improve net worth is to either reduce liabilities while assets stay constant or increase assets while liabilities either stay constant or fall.

 How Is Net Worth Calculated?

Net worth is calculated by subtracting all liabilities from all assets. An asset is anything owned that has monetary value. Liabilities are obligations that deplete resources.

Start with what you own: cash, retirement accounts, investment accounts, cars, real estate and anything else that you could sell for cash.

Then subtract what you owe: credit card debt, student loans, mortgages, auto loans and anything else you owe money on. Then boom—you’ve got your net worth.

Net worth can be computed using the following formula: Net Worth = Assets – Liabilities.

Example

Consider a couple who has the following assets and liabilities:

• Primary residence valued at Ksh 2,500,000
• An investment portfolio with a market value of Ksh 1,000,000
• Automobiles and other assets valued at Ksh.250,000

Liabilities include:

• An outstanding mortgage balance of Ksh 1,000,000
• A car loan of Ksh 100,000

The couple’s net worth would therefore be calculated like this:

Assets [Ksh,2500,000 + 1,000,000 + 250,000] =Ksh 3,525,000 

Liabilities [1,000,000 + 100,000] = Ksh 1,100,000

Net worth (Assets -liabilities) Ksh 3,525,000- Ksh 1,100,000= Ksh 2,425,000

Importance of Knowing Your Networth

Tracking your net worth over time is a helpful indicator of your financial stability. People work hard to bring home their salaries, but what happens after your paycheck hits your bank account is not always predictable.

Looking at your net worth can help you understand where your money has gone in the past versus where you want it to go in the future.

When deciding your next financial move, whether it’s buying a car or a house, taking out debt to go back to school, or hitting a new savings target, knowing your net worth helps you see the big picture.