Net Worth

AAA

DEFINITION of 'Net Worth'

The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.

Consider a couple with the following assets - primary residence valued at $250,000, an investment portfolio with a market value of $100,000 and automobiles and other assets valued at $25,000.

Liabilities are primarily an outstanding mortgage balance of $100,000 and a car loan of $10,000.

The couple's net worth would be therefore be $265,000 ([$250,000 + $100,000 + $25,000] - [$100,000 + $10,000]).

Assume that five years later, the couple's financial position is as follows - residence value $225,000, investment portfolio $120,000, savings $20,000, automobile and other assets $15,000; mortgage loan balance $80,000, car loan $0 (paid off). The net worth would now be $300,000.

In other words, the couple's net worth has gone up by $35,000 despite the decrease in the value of their residence and car, because this decline is more than offset by increases in other assets (such as the investment portfolio and savings) as well as the decrease in their liabilities.

INVESTOPEDIA EXPLAINS 'Net Worth'

People with a substantial net worth are known as high net worth individuals, and form the prime market for wealth managers and investment counselors. Investors with a net worth (excluding their primary residence) of at least $1 million - either alone or together with their spouse - are considered as "accredited investors" by the Securities and Exchange Commission, for the purpose of investing in unregistered securities offerings.

A company that is consistently profitable will have a rising net worth or book value, as long as these earnings are not fully distributed to shareholders but are retained in the business. For public companies, rising book values over time may be rewarded by an increase in stock market value. If you want to save some time in calculating your personal net worth, use our free Net Worth Tracker which allows you to calculate, analyze and record your net worth for free.

VIDEO

Loading the player...
RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  3. Sophisticated Investor

    A type of investor who is deemed to have sufficient investing ...
  4. Financial Plan

    A comprehensive evaluation of an investor's current and future ...
  5. Wealth

    A measure of the value of all of the assets of worth owned by ...
  6. Stockholders' Equity

    The portion of the balance sheet that represents the capital ...
RELATED FAQS
  1. What are the typical requirements to qualify for closed end credit?

    Typical requirements for a consumer to qualify for closed-end credit include satisfactory income level and credit history, ... Read Full Answer >>
  2. How did Richard Branson make his fortune?

    Richard Branson made his fortune by using the profits from his record store chain to found Virgin Records in 1972. He earned ... Read Full Answer >>
  3. What is the difference between a national and a regional investment brokerage?

    National and regional investment brokerages differ in several ways. National firms, also known as wire houses, maintain networks ... Read Full Answer >>
  4. What are common factors that lower your net worth?

    Net worth can be calculated by examining your financial assets and subtracting your financial liabilities. After using this ... Read Full Answer >>
  5. How do I stop emotional spending?

    Emotional spending occurs when an individual spends money for the sole purpose of improving a mood. Some reasons people ... Read Full Answer >>
  6. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
Related Articles
  1. Budgeting

    Stop Keeping Up With The Joneses - They're Broke

    Conspicuous consumption could be robbing you of future wealth.
  2. Budgeting

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
  3. Investing Basics

    Young Investors: What Are You Waiting For?

    By investing at a younger age, you can harness the power of compounding - not penny-pinching - for profit.
  4. Options & Futures

    3 Simple Steps To Building Wealth

    Getting richer is easier if you take it one step at a time.
  5. Entrepreneurship

    Run Your Personal Finances Like A Business

    The principles that contribute to success in business can also help you achieve your financial goals.
  6. Retirement

    What's Your Net Worth Telling You?

    Net worth provides a road map for retirement - learn if you're headed in the right direction.
  7. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  8. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  9. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  10. Economics

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!