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. Stockholders' Equity

    The portion of the balance sheet that represents the capital ...
  6. Wealth

    A measure of the value of all of the assets of worth owned by ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. How is accounting in the United States different from international accounting?

    Despite major efforts by the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, ... Read Full Answer >>
  6. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... 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. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
  8. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  9. Economics

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  10. Economics

    How to Calculate Trailing 12 Months Income

    Trailing 12 months refers to the most recently completed one-year period of a company’s financial performance.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center