Assets are anything that a person or an entity owns that has value. It may include:
Cash or cash equivalents such as life insurance policiesInvestments such as stocks or bondsReal estate, motor vehicles, jewelry, collectibles, and other tangible assetsEquipment or inventory for a business
Liabilities are financial obligations or debt. This may include:
Mortgage Auto loan or student loan Credit card balance Accounts payable (for a business)
If a couple has $100,000 in checking, savings, and retirement accounts, lives in a home worth $300,000, and drives two cars worth $15,000 each, their assets total $430,000. (Let’s assume they don’t own expensive jewelry, furniture, or other illiquid assets, nor do they have life insurance policies.) If they owe $100,000 on their mortgage loan, $10,000 in auto loans, and have credit card debt of $5,000, their liabilities total $115,000. Thus, their net worth is calculated by subtracting $115,000 in liabilities from their $430,000 in total assets, or $315,000.
How Does Net Worth Work?
Knowing your net worth is important because it can be a valuable gauge of your financial health. When tracked year over year, net worth can show if an individual or a company is making progress toward improving their financial well-being. Once you have calculated your net worth, a plan can be developed to steadily increase it. This can be done by saving more money, paying down debt, growing your investments, or noting an increase in an asset’s value, such as a home. Net worth is not calculated to compare financial health against others, but rather, to help you gauge your progress toward increasing your net worth from year to year. In retirement, your retirement spending strategy may allow for your net worth to decrease year over year as long as your savings will last for your full life expectancy. Initially calculating your net worth will require gathering a significant amount of information, but it should be easier in subsequent years if you keep all that information in a secure place.
Types of Net Worth
One can calculate the net worth of a household, business, industry, or a governmental entity such as a city, state, or country. The net worth of a business is commonly referred to as “shareholder equity.” It is the total amount of assets that shareholders will own once a business’s debts and liabilities are paid off. Companies and public entities regularly calculate their net worth for many of the same reasons a household does: to gauge financial health, to indicate when measures should be taken to improve financial health, and to help assess progress in improving financial health. A company that is consistently profitable will likely increase its net worth steadily, which is often accompanied by an increase in its stock price.
What Net Worth Means for Households
Net worth provides individuals a means to assess their financial health and set future goals. It is ideal to increase net worth as you age. A negative net worth is not a sign to panic for young people, who may be tackling college loans, an auto loan, and daily living expenses while earning a starting salary in their chosen career. There is no “right” net worth to aim for. National averages are available that can provide something to measure your financial situation against. The median net worth of all U.S. families was $121,700 in 2019, according to the Federal Reserve Board’s Survey of Consumer Finances. Monitoring net worth can help with financial decisions and in assessing progress. Lowering or eliminating debt is a good way to increase one’s net worth, but it’s important to remember that a sound personal finance strategy often includes investing and paying down debt simultaneously.
