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- Net worth is an individual or company's total assets, minus any liabilities or debts.
- Net worth presents an easy way to measure a person or company's financial standing.
- Keeping track of your net worth can help put your debts into perspective and plan for the future.
If you're looking to gain insights into your overall financial health, rather than getting lost in short-term budgeting, understanding net worth is a must.
While sometimes you need to focus on day-to-day tasks like seeing if your next paycheck will cover your bills, calculating and trying to improve your net worth can help you gain a big-picture view of how you're doing financially, what you can afford long term, what you should be doing better, etc. That said, net worth isn't without its limitations.
Here's a deep dive into the most important things to know about net worth.
Understanding net worth
Net worth can be applied to a person, a company, or an entire industry to essentially assess how much money they have overall. For example, you might only have $100 in your bank account, but maybe you own your house, a car, and some collectibles, and these outweigh your debts. So, when considering net worth, you may essentially have more money than what's in your bank account, as that account alone doesn't tell the full story of what you own and what you owe.
Definition of net worth
Net worth is the total value of your financial assets minus your liabilities or debts.
- Assets: Assets are what you own, including cash in bank accounts, savings, and retirement accounts. It also includes items like investments, vehicles, and real estate.
- Liabilities: Any money you owe counts as a liability. This includes outstanding student loans, credit card bills, and mortgage payments.
Importance of knowing your net worth
Net worth presents an easy way to measure a person or company's financial standing.
It's a fairly straightforward formula, calculated by subtracting liabilities from assets, but the real leg work comes from compiling the numbers that make up these two categories.
On an individual basis, net worth serves a few key purposes:
- Evaluating where you are financially: Determining your net worth can help answer questions like whether you're saving enough for retirement (as your retirement portfolio might not be the only assets you can use in retirement), if you're falling behind on debts, and whether you have enough money set aside should an emergency hit. It also helps you make more relevant comparisons.
For example, in your 20s, maybe all your money was in your bank account, totaling $5,000. In your 30s, maybe you still only keep $5,000 in your bank account, but you have lots of money in investment accounts and assets like vehicles, without much debt. Your net worth would reflect this growth, showing that you essentially have more financial resources than before, as these assets can typically be converted to cash if needed or used as collateral for borrowing.
- Identifying problem areas: Calculating your assets and liabilities to find your net worth can help you pinpoint where you're falling behind, whether that's noting a habit of racking up credit card balances or buying cars where the loan size makes them liabilities, not assets.
- Achieving financial goals: As important as it is to establish clear financial goals, it's also important to periodically evaluate whether you're on track to achieve them. Net worth can help you check how close you are to meeting retirement savings goals, being able to afford a home, having enough buffer for an emergency, etc.
Net worth vs. cash flow
Financial professionals often look at net worth and cash flows together for a more comprehensive view. The last line on a personal balance sheet depicts net worth, and this metric is straightforward, but not all-encompassing.
"It gives a snapshot in a period of time," says Vladimir Nikitenko, a certified financial planner (CFP) at Wealthstead Financial Advisors.
"The balance sheet lists your assets and liabilities, and that's kind of measuring the financial health of a client, so if I want an easy way to see what position this client or company is in, the easiest thing for me to do is to take a look at their balance sheet and their cash flows," says Nikitenko.
Net worth doesn't always directly correlate with cash flow, however, so it's important to distinguish between the two. Cash flow measures your income and expenses over a specific period, such as on a monthly basis, whereas net worth looks at overall assets vs. liabilities.
Your cash flow might decrease temporarily, if, say, you start paying for home repairs, because your expenses are up but your income is the same. However, it's possible that these home repairs end up boosting the overall value of your home to the point where your net worth rises — you don't necessarily immediately realize the benefit of the higher net worth, but it could mean that you have more money for retirement, for example, if you sell your home later on.
Still, cash flow is important. If you have negative cash flow for too long, for example, you could rack up debt that makes it hard to live month to month while decreasing your net worth.
Net worth vs. liquidity
Liquidity, or how much money you have readily available, is also an important factor to consider when measuring financial health. In the instance where someone has a high net worth on paper, but those funds aren't necessarily available, net worth isn't the most accurate representation of wealth.
"If they have a bunch of money in their retirement account but can't pay for a $10,000 emergency, that's a big problem and that's where net worth probably has its biggest limitations," says Nikitenko.
Yet it's possible to have a high net worth with strong liquidity, such as if you have a good chunk of money in liquid assets like stocks and bonds within a brokerage account that you can tap in an emergency.
Net worth vs. income
Net worth is not the same as income. Just because an individual earns a high income does not necessarily mean they have a high net worth — and vice versa.
If someone has a high salary but spends every dollar they make, they can't increase their savings and investments (beyond growth that might occur from existing assets), which holds their net worth back. If you earn $500,000 per year but only have a net worth of $1,000 (in an extreme example), you could be in trouble if you lose your job. On the flip side, someone who brings home a smaller paycheck but saves or invests most of their money can quickly and effectively grow their net worth.
Ultimately, net worth is made up of assets and liabilities, while income is what you earn from a job or any investments you've made.
What is a high net worth?
High net worth is used in the financial services sphere to refer to someone with wealth that exceeds a certain dollar amount. Yet the term "high-net-worth individual" is quite relative.
"If you're talking about practices, a high-net-worth client is someone who has over 5 million in assets," says Nikitenko. "[But] if you're talking about Forbes and the top people listed on there, a high net worth is in the billions, so that's a very, very relative term."
Your age group is also considered when determining what qualifies as high net worth. Net worth generally increases with age until it plateaus as older age groups retire and begin spending their retirement savings.
For young professionals, for example, a high net worth could be someone whose assets exceed $500,000. But among retirees, the metric changes (perhaps $1 million - $5 million, depending on your perspective) because they're expected to have accumulated more by that age and experience level.
Steps to calculate net worth
Calculating your net worth can help you better understand your current financial position and how you got there, as well as how you can make better investment moves to build and maintain wealth moving forward.
There are three primary net worth calculation steps:
1. Listing/valuing your assets
First you need to list out everything you own that has substantial value. In doing so, you also want to mark the value of each of these assets. While this does include some intangible assets like your investment accounts, it does not include your salary. Your income is part of your cash flow, not your net worth.
Instead, you likely want to list/value the following:
- Modes of transportation, including cars, motorcycles, and boats (note that there is a more complicated calculation to determine the actual value of depreciating assets like these, but we won't get into it for the sake of this example)
- The market value of your home, if you own it
- The cash value of a permanent life insurance policy
- The balance of any retirement accounts
- The balance of any taxable investment accounts
- The balance of any savings accounts
- The balance of any checking accounts
Some things you also may consider include:
- The cash value of any expensive jewelry, fine art, furniture, or clothing — You can probably skip counting the $20 that you could get from selling your toaster and instead focus on assets that have significant value.
- Business interests
2. Listing/valuing your liabilities
On the other side of the equation is your liabilities, i.e., what you owe, such as to lenders or tax authorities.
Here are the main categories you should list out and note the value of (i.e., the amount due):
- The balance of any mortgage(s)
- The total balance on any student loans
- The balance of an auto loan
- The balance of a personal loan
- The balance of a business loan that you've personally guaranteed
- The outstanding balance on any credit cards
- Any outstanding tax liability
3. Subtract your liabilities from your assets
After tallying up the above figures, you'll need to subtract your liabilities from your assets. The number you're left with is your net worth. The formula looks like this:
Assets - liabilities = net worth
But remember that net worth is a snapshot in time. If you're regularly making debt payments, or saving automatically in your 401(k), for example, your net worth will rise over time. On the flip side, if you take out a new loan or rack up a big credit card bill, your net worth may fall.
Net worth can be either positive, meaning assets exceed liabilities, or negative, with the opposite being true. Positive net worth signals strong financial standing, while negative net worth can be a financial red flag. To improve net worth, an individual must reduce liabilities while maintaining or growing their assets, or grow their assets while maintaining or reducing liabilities.
Examples of net worth calculation
Here are a couple of examples of what a net worth calculation might look like:
Example 1: Simple net worth calculation
If you own few assets and have few liabilities, your net worth calculation might be very simple.
For example, you might have the following:
Assets:
- Cash: $100
- Checking account: $200
- Savings account: $500
- Retirement account: $10,000
- Car: $10,000 (market value)
Total assets = $20,800
Liabilities:
- Student loans: $10,000
- Credit card balances: $5,000
- Car loan: $8,000
Total liabilities = $23,000
Since net worth = total assets - total liabilities, this person's net worth is $20,800 - $23,000, which equals a negative net worth of - $2,200.
This calculation shows how even though this person has some assets like a car that are worth a good amount, accounting for the amount owed on the car cuts into that. And while they have some retirement savings, their negative net worth shows they're far from being able to retire and need to do a lot more to start building up wealth.
Example 2: Comprehensive net worth calculation
Someone with a more complex financial situation might calculate their net worth as follows:
Assets:
- Cash: $1,000
- Checking account: $2,000
- Savings account: $5,000
- Brokerage account: $10,000
- Retirement account: $100,000
- Home: $500,000 (market value)
- Car: $20,000 (market value)
- Collectibles: $10,000 (market value)
- Business interests: $200,000 (fair market value of the business they own)
Total assets = $848,000
Liabilities:
- Car loan: $5,000
- Mortgage: $300,000
- Business loan (personally guaranteed): $20,000
- Credit card balances: $10,000
- Deferred taxes: $40,000
Total liabilities = $375,000
Since net worth = total assets - total liabilities, this person's net worth is $848,000 - $375,000, which equals a net worth of $473,000.
So, this person is in a much better financial position than the one in the previous example — not just because they have more assets, but because those assets far outweigh their liabilities. Having $473,000 isn't necessarily enough to meet their retirement goals, for example, but they could be on track.
Also, if they want to make moves like buying a new car, for example, they could likely afford to do so, as they have far more assets than liabilities. Not only could they sell their current car for a $15,000 gain ($20,00 value minus $5,000 loan) to put toward a new car, but they also have a large cushion if something happens like a job loss that would otherwise make it hard to keep up with car payments.
That said, if they want to increase their net worth, they might avoid buying a new car and instead put more money into investments.
Tools for calculating net worth
There are several free or low-cost ways to calculate your net worth, such as:
Online net worth calculators
You can simply search online for a net worth calculator, where you can plug in values for your assets and liabilities to calculate your net worth. These calculators might also have more advanced calculations for determining the value of assets like your car.
Personal finance software
You can also use personal finance software, like a budgeting app to link up all your accounts and automatically update your net worth and track it over time. Some apps cost money, but it's often worth it to get more of a real-time, automated view of your finances, helping you identify ways to grow your net worth and improve your cash flow.
Spreadsheet templates
You can also search online for spreadsheet templates, like an Excel net worth spreadsheet that lets you plug in values like an online calculator. Or, you could create your own version.
Tips for growing your net worth
Focusing on your net worth helps you reach goals like affording a home, retirement, and possibly leaving an inheritance. Some ways to maintain or grow your net worth include:
Regularly updating your net worth
As the saying goes, you can't manage what you don't measure. And because your net worth only serves as a snapshot in time, it's important to regularly measure it to see if anything's changed. That's where an app that automates net worth calculations can come in handy. You don't have to check every day, but perhaps looking every quarter or at least once per year to identify strengths and weaknesses can help you improve your overall finances.
Reducing debt
Attacking the liabilities side of the equation can improve your net worth while also freeing up cash flow that was previously going toward debt payments. The faster you can reduce debt, the faster you can also have more cash to then grow the assets side, such as by putting more money into your retirement account every month.
Investing wisely
Your net worth can grow on its own if you've made wise investment choices. That doesn't mean you have to be an expert stockpicker, but instead, simply putting money into diversified, low-cost funds, like one that tracks the S&P 500, can help you grow your investments by an average of roughly 10% per year, based on historical returns.
FAQs about net worth
Net worth equals total assets minus total liabilities, so it shows the overall value of what someone owns, after deducting what they owe.
Knowing your net worth is important because it helps you understand your overall financial health and make better choices. For example, you might have a high income but negative net worth because you're racking up debt, and seeing this reflected in your net worth underscores that you can't afford the loans you're taking.
Anything of significant value should be included in your net worth calculation, such as cash, bank accounts, investment accounts, real estate, and vehicles.
Anything significant that you owe should be included in your net worth calculation, such as a mortgage, student loans, personal loans, and credit card debt. You can probably leave out very small amounts like the $20 you owe your friend for lunch unless you want to be super detailed.
If you're not using software that automatically calculates your net worth, consider doing the calculations at least once per year or when facing significant financial changes, like taking out a new car loan.
