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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 financial health, understanding net worth is a must.
Net worth is used by financial advisors to determine what you're doing well and what you should be doing better, but it isn't without its limitations. Here's everything you need to know about net worth.
What is net worth?
Net worth is the total value of your financial assets minus your liabilities, or debts.
- Assets: Assetsare 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.
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.
Understanding net worth
Net worth can be applied to a person, a company, or an entire industry. It's used by professionals to conduct an "as-is analysis," or to determine whether someone has equity and what that equity is worth.
It's also used to track financial progress by comparing annual statements year over year. If net worth grows over time, it means that business overall is growing, which is especially helpful because looking at assets or debt alone do not paint the full picture.
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, what debts you're falling behind on, and whether you have enough money set aside should an emergency hit.
- Identifying problem areas: Calculating your net worth can help you pinpoint where you're falling behind, whether that's in paying off a debt or noting a habit of overspending in other areas.
- 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, and reshape current savings practices if need be.
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 Certified Financial Planner Vladimir Nikitenko.
"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 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. Someone's net worth can increase from one year to another when they don't have a significant cash flow, so long as they're reducing expenses.
Liquidity, or how much money you have regularly available, is 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.
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 money with ease, it's reflected poorly in their net worth. 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.
How to calculate net worth
You can calculate your net worth in three steps:
1. List your assets
First you need to list out everything you own that has substantial value. 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.
Here's what you should include:
- 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 permanentlife insurancepolicy
- The balance of anyretirement accounts
- The balance of any taxable investment accounts
- The balance of anysavings accounts
- The balance of any checking accounts
Some things you may consider including:
- The cash value of any expensive jewelry, fine art, furniture, or clothing
- Business interests
2. List your debts
Your debt is what you owe to creditors or lenders.
Here's what you should include:
- The balance of any mortgage(s)
- The total balance on any student loans
- The balance of anauto loan
- The balance of apersonal loan
- The balance of a business loan
- The outstanding balance on anycredit 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 your401(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. You can use a budgeting appto link up all your accounts and automatically update your net worth and track it over time.
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.
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. In reality, 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 five 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 because they're expected to have accumulated more by that age and experience level.
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.
Investing Reference Fellow
Amena is a former Investing Reference Fellow for Insider. She's a senior at UNC-Chapel Hill studying journalism and business administration and before joining BI, she was a reporting intern on the cross-asset team at Bloomberg News.
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