What is Net Worth?



Next video:
Loading the player...

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.

Net worth is a concept that can be applied to both individuals and businesses, as a measure of how much they are really worth. In the corporate world, net worth is also called book value or shareholders' equity. The word “net”, in financial language, means “after subtracting expenses and debts.”

A consistent increase in net worth means assets are growing faster than debts, and indicates good financial health. Conversely, when liabilities grow faster than assets, or when the value of assets drop, net worth decreases, indicating financial problems.

What is the Jones’ net worth? They have a home valued at $250,000, an investment portfolio of $100,000, and automobiles and other assets worth $25,000. Their liabilities are a mortgage balance of $100,000 and a car loan of $10,000.

By adding the assets, and subtracting the liabilities, we find the Jones' net worth is $265,000.

Now five years later, the Jones’ financial position has changed: their home value has decreased to $225,000, their investment portfolio has increased to $120,000, they now have savings of $20,000, and their car and other assets have decreased to $15,000. On the liabilities side, their mortgage balance has dropped to $80,000, and they’ve paid off their car loan. By adding assets and subtracting liabilities, their net worth is now $300,000.

In other words, despite the decrease in the value of their home and car, the couple's net worth increased by $35,000. This is because the decreases were more than offset by increases in other assets, and a reduction in debts.

Related Articles
  1. Personal Finance

    Will Your Net Worth Be Affected By A Recession?

    Here's a look at how a potential recession could impact your net worth in a negative way.
  2. Personal Finance

    Members Of Congress With The Highest Net Worth

    Members of Congress make much more than the average American citizen. Here are the four wealthiest congressmen.
  3. Investing

    The Importance Of Knowing Your Net Worth

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

    The Complete Guide To Calculating Your Net Worth

    Here's everything you need to know about calculating your net worth.
  5. Personal Finance

    Ways To Destroy Your Net Worth

    Many people fall victim to these mistakes, and they can drastically affect a person's net worth in a negative way.
  6. Savings

    How Inflation Affects Your Net Worth

    When calculating your net worth, don't forget to take inflation into account.
  7. Savings

    Are You On Track To Hit Your Desired Net Worth By Retirement?

    Here are some calculations to determine if your net worth is what it should be at your age.
  8. Taxes

    How The Fiscal Cliff Could Affect Your Net Worth

    With upcoming changes in tax rates, is your net worth going to be affected?
  9. Philanthropy

    How Billionaires Around the Globe Give Back

    This list of foreign billionaire philanthropists is robust. Here's a list of rich entrepreneurs around the globe who have given back in really big ways.
  10. Term

    What High Net Worth Means

    A high net worth individual is someone with many liquid financial assets.
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center