What is Net Worth?

Net worth is like a measuring stick for your wealth…

It’s what you have left after accounting for all your debts. To build your net worth, you’ll need to either increase your assets (like cash or equity in a business) or decrease your debts (perhaps pay off your student loans or credit card bills).

Your net worth includes both assets and liabilities (debts). Assets include things like stocks, balances in savings accounts, and equity in a business — anything of monetary value that you own. Liabilities include balances on student loans, car loans, or mortgages, as well as credit card debt — anything you owe.

Your net worth does not directly take your income into account. For example, let’s say you make $50,000 a year from your full-time job. Your salary itself is not an asset that’s counted in the net worth calculation. But there is a connection between what you make and your net worth: Your personal income statement tracks your income and expenses over a period. This includes your salary (as well as any other income) and your regular expenses, such as groceries, rent, and mortgage payments. What’s left over is your net profit or loss (depending on whether you spend more or less than you make). This profit or loss is considered part of your net worth.

Your personal balance sheet is what shows your net worth — It tracks all of your net profit or loss that has built up so far, plus any other assets and debts you currently have.

Your assets can include a variety of things:

Liquid Assets

These are assets that you can easily convert into cash. That includes cash on hand and money in your checking and savings accounts. It also encompasses investments such as mutual funds, bonds, certificates of deposit (CDs), money market accounts, and stocks.

Retirement Investments

All retirement accounts count as assets. So your 401(k), individual retirement accounts — such as a traditional IRA or Roth IRA — and your personal retirement savings are all included.

Real Estate

Include any real estate you own — whether your primary residence, second home, vacation home, or investment property — when adding up your assets. You’ll want to get an accurate picture of what your home is worth today, not what you paid or what you think it’s worth. You can gauge market value by comparing the real estate to similar properties in the same neighborhood that have recently been sold or appraised (websites like Zillow can help).

Personal Property

You should also include any valuable personal assets that have resale value, such as an expensive car, jewelry, or artwork. You may want to use a conservative estimate, because items like this often have limited resale value.

Business Interests

Count the value of any stakes you hold in a business. Make sure you record the market value of your share of the business, not the business’s book or accounting value, in your net worth calculation. Market value is how much you’d get if you sold your share of the company at that moment.

Your liabilities are everything you owe:

Loans

All your loans — such as mortgages, student loans, and personal loans — are liabilities. Use the current outstanding balance (including any interest), not the amount you originally borrowed or may owe in the future.

Credit Cards

Your credit cards are revolving debt — You have a limit you can borrow against multiple times, as long as you repay it (unlike a loan which you borrow only once). Use the credit card balance when you calculate your net worth. Since the balance changes every month, your net worth will be different when you calculate it again next month.

Other Liabilities

Any financial obligation is a liability. Other examples include medical debt, money you owe in taxes, child support or alimony payments you’re behind on, or outstanding judgments against you.

Net worth is a measurement of your financial health at one moment in time.

Having a positive net worth means that you own more than you owe. Let’s say your assets total $500,000, and your liabilities come to $100,000. You have a positive net worth of $400,000 ($500,000 - $100,000 = $400,000).

Having a negative net worth means you owe more than you own. For instance, if your assets equal $200,000, but your liabilities are $300,000, you would have a negative net worth of -$100,000 ($200,000 - $300,000 = -$100,000).

Your net worth is bound to fluctuate. People tend to accumulate more assets over time, as they pay down debts, increase their incomes, and see returns on investments. You may also have periods in your life where you choose to take on more debt, such as a loan for home renovation.

By periodically calculating your net worth, you can track your financial progress over time. Ideally, your net worth trends upward over your lifetime. For example, as you pay off a home loan, build equity, and accumulate more assets, your net worth is likely to increase.

When you reach retirement and start tapping into your savings, your net worth will likely fall. Therefore, having a good net worth before you hit your golden years can help support your lifestyle in retirement.

Since people’s income, goals, and obligations differ, not everyone will have the same net worth by a given age. These guidelines are estimates for how much you should have saved for retirement by certain ages:

When you’re in your 20s, it’s normal for your net worth to be negative. You may be burdened with student or car loans and earning a low salary that doesn’t give you the opportunity to save much.

As time goes by, you have the opportunity to put away and invest money for retirement. Your salary may increase, making it easier to save and invest. If you purchase a home, your equity may climb over the years as you pay down your mortgage and the property grows in value. Ideally, your portfolio gains value over the decades thanks to compound interest — or interest earned on interest.

Once you hit retirement, your net worth may decline once again as you draw down your savings and your income falls. However, if your net worth is high enough, the money you draw out may be offset by growth in your investments.

The basic net worth formula is:

Total assets — Total liabilities

Personal Net Worth

Many online calculators can help you calculate your net worth. They can walk you through listing your assets and liabilities and measuring the difference.
You can also use a net worth worksheet. Just open up a spreadsheet, and detail your assets on one side and your liabilities on the other. To calculate your personal net worth, subtract your liabilities from your assets.

It’s important to note that with loans, such as with your mortgage or car loan, you should list the current market value of the asset tied to the loan (i.e., the car or house) as part of your assets. Don’t use the amount you paid. Then include the amount of money that you still owe in your liabilities calculation.

Company Net Worth

Businesses also have a net worth, often called book value or shareholders’ equity. It follows the same basic net worth formula: The value of the company’s assets minus all financial obligations.

A company’s balance sheet typically lists its net worth. You can also calculate it yourself by adding up its assets (such as cash, accounts receivable, and marketable securities) and subtracting its liabilities (such as debt, payroll, and tax liabilities).

Investors and lenders pay attention to net worth when deciding whether to provide funding to a company, since it’s a key sign of financial fitness.