Glossary Term
Net Worth
The value of all your assets minus all your liabilities.
Detailed Explanation
Net worth is the most accurate single metric to determine a person's true financial health. It is calculated simply by taking the value of everything you own (your assets) and subtracting everything you owe (your liabilities/debts). A high income does not necessarily mean a high net worth if that person spends all their money or is drowning in debt.
The Formula
Net Worth = Total Assets - Total LiabilitiesReal-World Example
If you own a $400,000 house, have $50,000 in investments, and $10,000 in a checking account, your Total Assets are $460,000. If you owe $300,000 on your mortgage and $20,000 on a student loan, your Total Liabilities are $320,000. Your Net Worth is $140,000.
Key Takeaways
- •Net Worth is a snapshot of your wealth at a specific moment in time.
- •It is entirely possible (and common) for young graduates with student loans to have a negative net worth.
- •Tracking your net worth over time is the best way to measure financial progress.