What is Net Worth?

Assets vs. Liabilities

An asset is a resource that is providing economic value or expected to promote economic value in the future. Simply put, it's worth money. There are three important properties that every “asset” needs to have to be considered a true asset. It needs to…

1. Be owned or controlled by the person claiming it.
2. Have some economic value, meaning it can be sold or converted to cash or used to support growth in current and future income.
3. Be able to generate future income.

A liability is something that is owed—it takes a steady cash flow rather than giving one. For example, owing $400,000 on a mortgage is a liability. Contrary to popular belief, debt isn’t necessarily bad, but knowing your net worth will put things into a whole new perspective. For example, let’s say someone is halfway through paying down a mortgage of $400,000—meaning they’ve already paid $200,000 on it. That $200,000 that they’ve paid down is an asset and the $200,000 they have left to pay is a liability.

When will I need to know my net worth?

Much like credit scores, net worth tells you where you stand financially and helps you prepare for retirement. Though having a negative net worth isn’t necessarily bad, it does show you that there’s still work to do before you’d feel comfortable retiring. Ideally, you’d have a positive net worth by the time you retire.

How do I calculate net worth?

In simple terms, finding net worth is as easy as subtracting what you owe from what you own. The complicated part comes when you’ve got tons of property, business expenditures, and debts that fluctuate in economic value constantly. For the average person, however, it’s as simple as adding up mortgages, credit card debt, car loans, etc. and then subtracting that from the total value of bank accounts, owned property, and any other assets.