Net Worth: What It Is and How to Calculate It (2024)

What Is Net Worth?

Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company's health, providing a useful snapshot of its current financial position.

Sometimes called net wealth, one's net worth is used in the financial world to qualify certain individuals for particular investment strategies or financial products such as hedge funds, structured products, or other complex or alternative investments. Net worth has also become a fixation of popular culture, with lists ranking the people with the highest net worth as well as the net worth of various celebrities.

Key Takeaways

  • Net worth is a quantitative concept that measures the value of an entity and can apply to individuals, corporations, sectors, and even countries.
  • Net worth provides a snapshot of an entity's current financial position.
  • In business, net worth is also known as book value or shareholders' equity.
  • People with substantial net worth are called high-net-worth individuals (HNWI).
  • Elon Musk currently has the highest net worth of any individual on the planet.

Net Worth: What It Is and How to Calculate It (1)

How to Calculate Net Worth

Net worth is calculated by subtracting all liabilities from assets. An asset is anything owned that has monetary value, while liabilities are obligations that deplete resources, such as loans,accounts payable (AP), and mortgages.

Net worth can be described as either positive or negative, with the former meaning that assets exceed liabilities and the latter that liabilities exceed assets. Positive and increasing net worth indicates good financial health. Decreasing net worth, on the other hand, is cause for concern as it might signal a decrease in assets relative to liabilities.

The best way to improve net worth is to either reduce liabilities while assets stay constant or rise or increase assets while liabilities either stay constant or fall.

Net worth can be applied to individuals, companies, sectors, and even countries.

Net Worth in Business

In business, net worth is also known as book value or shareholders' equity. The balance sheet is also known as a net worth statement. The value of a company's equity equals the difference between the value of total assets and total liabilities. Note that the values on a company's balance sheet highlight historical costs or book values, not current market values.

Lenders scrutinize a business's net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company's ability to repay its loans.

A consistently profitable company will register a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of its stock price.

Net Worth in Personal Finance

An individual's net worth is simply the value that is left after subtracting liabilities from assets.

Examples of liabilities include debts like mortgages, credit card balances, student loans, and car loans. Liabilities can also include obligations that must be paid such as bills and taxes.

An individual's assets, meanwhile, include checking and savings account balances, the value of securities such as stocks or bonds, real property value, and the market value of an automobile. Whatever is left after selling all assets and paying off personal debt is the net worth.

People with substantial net worth are known as high net worth individuals (HNWI) 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 "accredited investors" in the eyes of the Securities and Exchange Commission (SEC), and, therefore, permitted to invest in unregistered securities offerings.

Important

Note that the value of personal net worth includes the current market value of assets and the current debt costs.

Example of Net Worth

Consider a couple with the following assets:

  • Primary residence valued at $250,000,
  • An investment portfolio with a market value of $100,000,
  • Automobiles and other assets valued at $25,000.

Liabilities include:

  • An outstanding mortgage balance of $100,000
  • A car loan of $10,000

The couple's net worth would, therefore, be calculated as:

[$250,000 + $100,000 + $25,000] - [$100,000 + $10,000] = $265,000

Assume that five years later, the couple's financial position changes: the residence value is $225,000, investment portfolio $120,000, savings $20,000, automobile and other assets $15,000; mortgage loan balance $80,000, and car loan $0 because it was paid off. Based on these new figures, the net worth five years later would be:

[$225,000 + $120,000 + $20,000 + $15,000] - $80,000 = $300,000.

The couple's net worth has gone up by $35,000, despite the decrease in the value of their residence and car. As we can see above, these declines were more than offset by increases in other assets, in this case, the investment portfolio and savings, as well as a drop in liabilities owed.

Negative Net Worth

A negative net worth results if total debt is more than total assets. For instance, if the sum of an individual's credit card bills, utility bills, outstanding mortgage payments, auto loan bills, and student loans is higher than the total value of their cash and investments, their net worth will be negative.

Negative net worth is a sign that an individual or family needs to focus its energy on debt reduction. A tough budget, the use of debt reduction strategies such as the debt snowball or debt avalanche, and perhaps negotiation of some debts with creditors can sometimes help people climb out of a negative net worth hole and start building up their resources.

Early in life, a negative net worth is not uncommon—student loans mean even the most careful-with-money young people can start out owing more than they own. Family responsibilities or an unexpected illness can also push people into the red.

When nothing else has worked, filing for bankruptcy protection to eliminate some of the debt and prevent creditors from trying to collect on it might be the most appropriate solution; however, some liabilities—such as child support, alimony, taxes, and often student loanscannot be discharged. It’s also worth bearing in mind that bankruptcy will stay on an individual's credit report for many years.

What Is a Good Net Worth?

Determining what a "good" net worth is will vary for every individual, according to their life circ*mstances, financial needs, and lifestyle. The average net worth of an individual in the U.S. was $121,700 in 2019, according to the latest data from the Federal Reserve.

How Do I Calculate My Net Worth?

To calculate your net worth, you subtract your total liabilities from your total assets. Total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.

How Much Should I Have Saved?

How much you should have saved will depend on your age, your career, your lifestyle, and your life's circ*mstances. Fidelity, for example, recommends having saved three times your annual salary by the time you are 40 across all of your retirement accounts.

How Many People in America Are Considered "High Net-Worth"?

The United States had the most HNWIs in the world in 2021, with more than 7.4 million such people.

The Bottom Line

Net worth is a good way of understanding the true wealth of an individual or business. Looking only at one's assets can be misleading since this is often offset by some amount of liabilities, such as debt. One's net worth can be increased, therefore, by increasing assets while reducing debts and other liabilities.

Net Worth: What It Is and How to Calculate It (2024)

FAQs

Net Worth: What It Is and How to Calculate It? ›

Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.

How do you answer what is your net worth? ›

How Do I Calculate My Net Worth? Subtract your total liabilities from your total assets. Your total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.

What explains your net worth? ›

It's the total value of all your assets—including your house, cars, investments and cash—minus your liabilities (things like credit card debt, student loans, and what you still owe on your mortgage). We just made it easier for you to find that number with our Net Worth Calculator.

What should my net worth be based on my income? ›

A common rule of thumb for determining what your net worth should be at any given age is to divide your age by 10, then multiple that by your gross annual income. So if you're 40 years old making $100,000 a year then you should have a net worth of $400,000.

What is the net worth rule? ›

To calculate your net worth, subtract your liabilities from your assets. So your net worth equals your assets minus your liabilities.

How do I calculate my net worth? ›

Your net worth is the value of all of your assets, minus the total of all of your liabilities. Put another way, it is what you own minus what you owe. If you owe more than you own, you have a negative net worth. If you own more than you owe you will have a positive net worth.

What is the formula for calculating net worth? ›

Net worth is the net value of the value of an individual's assets minus the value of an individual's liabilities. Net worth = Assets - Liabilities. Negative net worth is represented when assets are less than liabilities. Assets are items owned that have value, while liabilities are obligations owed.

What assets count towards net worth? ›

1. List your assets (what you own), estimate the value of each, and add up the total.
  • Money in your bank accounts.
  • Value of your investment accounts.
  • Your car.
  • Market value of your home.
  • Business interests.
  • Personal property, such as jewelry, art, and furniture.
  • Cash value of any insurance policies.

What is a good net worth by age? ›

Average net worth by age
Age by decadeAverage net worthMedian net worth
20s$104,878$7,467
30s$292,609$35,435
40s$740,646$126,126
50s$1,345,922$290,271
4 more rows

Does net worth include home? ›

Household wealth or net worth is the value of assets owned by every member of the household minus their debt. The terms are used interchangeably in this report. Assets include owned homes, vehicles, financial accounts, retirement accounts, stocks, bonds and mutual funds, and more.

What is excluded from net worth? ›

Net worth is assets minus liabilities. Things that are not included are things that are neither assets nor liabilities. Income and expenses, for instance, are not directly included in net worth.

What net worth is considered rich? ›

For example, individuals with $1 million in liquid assets are generally classified as having a high net worth. To be considered very high net worth, one might need assets ranging from $5 million to $10 million, while an ultra-high net worth status could require $30 million or more.

What counts under net worth? ›

To figure out your net worth add up your assets (the cash you've got in bank accounts, investments, retirement accounts, etc. as well as the value of any properties you own) and then subtract any liabilities (debt, including student loans, credit card, your mortgage, etc.) that you owe.

What does it mean when someone asks your net worth? ›

Intangibles such as your personal network are sometimes considered assets as well. Your liabilities, on the other hand, represent your debts, such as loans, mortgages, credit card debt, medical bills, and student loans. The difference between the total value of your assets and liabilities is your net worth.

What describes a person's net worth? ›

Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed. This net worth calculator helps determine your net worth. It also estimates how net worth could grow or decline over the next 10 years.

Is your net worth how rich you are? ›

According to Schwab's Modern Wealth Survey, Americans said last year that it takes an average net worth of $2.2 million to qualify a person as being wealthy. (Net worth is the sum of your assets minus your liabilities.)

What is a good net worth? ›

Net worth is the difference between the values of your assets and liabilities. The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74. Net worth, however, tends to drop for those 75 and older.

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