Loading the player...

What is 'Net Worth'

Net worth is 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Deficit Net Worth

    A scenario in which liabilities are higher than assets. Deficit ...
  2. Tangible Net Worth

    A measure of the physical worth of a company, which does not ...
  3. Effective Net Worth

    The shareholders' equity of a corporation, plus subordinated ...
  4. Return On Net Assets - RONA

    A measure of financial performance calculated as: Fixed assets ...
  5. Net Interest Income

    The difference between the revenue that is generated from a bank's ...
  6. Asset Accumulation

    The increase in the value of financial property and investments ...
Related Articles
  1. Investing

    What is Net Worth?

    Net worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of everything you own, minus all your debts.
  2. Investing

    The Importance Of Knowing Your Net Worth

    It is vital that you track your net worth no matter what your age.
  3. Personal Finance

    What's Your Net Worth Telling You?

    Net worth provides a road map for retirement - learn if you're headed in the right direction.
  4. Managing Wealth

    Assets That Increase Your Net Worth

    Your home, properties and vehicles can all increase your net worth.
  5. Managing Wealth

    The Complete Guide To Calculating Your Net Worth

    Here's everything you need to know about calculating your net worth.
  6. Investing

    What High Net Worth Means

    A high net worth individual is someone with many liquid financial assets.
  7. Retirement

    Why You Should Know Your Net Worth In Retirement

    Just because you are comfortably in retirement, that doesn't mean you should stop keeping track of your net worth.
RELATED FAQS
  1. What are common factors that lower your net worth?

    Net worth is determined by calculating financial assets versus liabilities. As the liabilities increase versus the assets, ... Read Answer >>
  2. What are the differences between personal and business tangible net worth?

    Understand what the term tangible net worth represents, its significance, and how the calculation of net worth differs for ... Read Answer >>
  3. What does your net-worth consist of?

    Discover what your specific assets and liabilities are and how to classify the components that go into calculating your net ... Read Answer >>
  4. When evaluating an individual's current financial status, liquid net worth would ...

    The correct answer is B). Total net worth is defined as all assets minus all liabilities. Liquid net worth is all assets ... Read Answer >>
  5. How do you calculate net debt using Excel?

    Learn about the net debt formula and how to calculate this financial metric using Microsoft Excel, including a brief explanation ... Read Answer >>
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center