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. Effective Net Worth

    The shareholders' equity of a corporation, plus subordinated ...
  3. Adjusted Book Value

    A measure of a company's valuation after liabilities, including ...
  4. Asset Accumulation

    The increase in the value of financial property and investments ...
  5. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  6. Asset Value Per Share

    The total value of a fund's investments divided by its number ...
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. Investing

    What High Net Worth Means

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

    Common Liabilities That Hurt Your Net Worth

    Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
  7. Personal Finance

    Why You Should Know Your Net Worth In Your 20s

    Even if you are just entering the workforce and haven't had time to save or invest, you still need to be aware how much you're worth.
RELATED FAQS
  1. What is the difference between book value and market value

    Learn the differences between book value and market value, and see how investors use each type to determine if a company ... Read Answer >>
  2. 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 >>
  3. How do you calculate net current assets in Excel?

    Learn how to calculate net current assets, or working capital, in Microsoft Excel and how to evaluate the financial health ... Read Answer >>
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center