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. Return On Net Assets - RONA

    A measure of financial performance calculated as: Fixed assets ...
  2. Asset-Based Approach

    A type of business valuation that focuses on a company's net ...
  3. Net Liquid Assets

    A measure that examines a company's net liquid financial assets. ...
  4. Embedded Value

    A common valuation measure used outside North America, particularly ...
  5. Absolute Value

    A business valuation method that uses discounted cash flow analysis ...
  6. Adjusted Net Asset Method

    A business valuation procedure used in acquisition accounting ...
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. Investing

    What High Net Worth Means

    A high net worth individual is someone with many liquid financial assets.
  4. 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.
  5. Personal Finance

    How To Improve Net Worth By Decreasing Liabilities

    Here's an analysis of how to adjust liabilities and assets to improve net worth.
  6. Managing Wealth

    How to Calculate Your Tangible Net Worth

    Your net worth can be calculated with a simple equation.
  7. Investing

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
  8. Personal Finance

    Net Worth Throughout Your Life

    Here are some estimates of what your net worth should be at certain stages of your life, depending on how much you earn for income.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. Why is the amount of net tangible assets an important benchmark?

    Find out more about net tangible assets, how to calculate net tangible assets and the importance of net tangible assets and ... Read Answer >>
  5. What is the difference between a company's book value per share and its intrinsic ...

    Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
  6. Is book value a better metric for company worth than the PE ratio?

    Determine the best situations in which to utilize book value, P/E ratio and other metrics to determine the true worth of ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center