If you follow any kind of financial news or listen to talk shows that give money advice, you’ve likely heard the term “net worth.” It’s an important measurement, both for those hoping to grow wealth, and those wanting to get out of debt. What is the official net worth meaning? Simply put, it’s the difference between your assets and your liabilities.
When using the word “assets”, most financial professionals are including everything you currently own or have an interest in. The most common assets would be liquid items. These are items such as cash or items that can easily be cashed out without penalty. This may be:
- cash in your checking, savings, or sock drawer
- Treasury bills or CD’s
- money market funds
Real estate is another major asset included in the traditional net worth meaning. Some financial professionals are reluctant to include a primary homeowner’s residence in the net worth formula, but it is generally accepted as an asset for this purpose. Partial ownership can be counted, such as the equity in your home – even if it’s under mortgage. Any principal you’ve paid off generally counts in most acceptable explanations of an asset. Unimproved land and rental properties count, too.
Your investment accounts, whether for retirement or not, are assets. Anything stashed in a 401(k) that you’re fully vested in, for example, is an asset. Stocks, bonds, IRA’s, Roth accounts, and shares in someone else’s corporation are also assets.
Whether you choose the value of your business is completely up to you. Since it may be among the most illiquid of all the things you own, many professionals don’t count it for a net worth. The value can also be difficult to determine.
Other items that you can count are largely personal in nature. Jewelry, collections, boats, cars, and insurance policies can be added to the assets class. You may also be able to count money owed to you that is certain to be coming; settlement payments or structured loans are common examples.
Debt is the other word for liability. Any money or interest owed to someone else will be factored into this number. Common liabilities are school loans, mortgages, credit card debts, tax liens, medical bills, child support payments, or other balances that you have gotten benefit from but haven’t finished paying for.
Remember that for many of your assets, there will also be a liability. If you own something of significant value, it’s likely that you are still paying for a portion of it. Check each of your assets for a matching liability, and vice versa. This is a good method to make sure you aren’t missing any important numbers!
Calculations: What is Net Worth?
Now it’s time to do some math! After totaling up all your assets and all your liabilities, you can now truly see your net worth. Subtract your liabilities from your assets to get the number that most personal finance experts focus on the most. For many, it will be a negative net worth, meaning your liabilities outweigh your assets. This can be largely due to the debt many of us take on in our young adult years. School loans and mortgages can eat up a big chunk of your asset value.
We all want to end up with a positive net worth, meaning that our assets are larger than our liabilities. The ultimate goal, of course, to be that you end up with a positive and healthy net worth number. A sign of very good money health is a number that grows larger over time.
If you are not happy when figuring out your own net worth, you will need to do one of two things. These are the only ways to change your net worth number for the better. You can increase your assets (usually by earning more or making good investment decisions that provide healthy returns.) You can also decrease your liabilities; most people make payments toward debt to satisfy this result.
The Importance of Net Worth Meaning
There has been a trend as of late for bloggers, celebrities, and reality TV stars to share their net worth over time with an audience. This transparency has been good for bringing awareness to the process of determining and tracking net worth. But it has also caused the focus to often be on one number alone as an indication of financial health. Some experts find liquidity or earning power to be as important as net worth – if not more important. Your financial advisor should be able to provide a suitable net worth meaning and explain how it contributes to your financial health as a whole.