What Is Net Worth?
Net worth is what you own minus what you owe. Add up your assets, such as cash, investments, and property, then subtract your debts, like loans and credit cards. The result is your net worth, a single snapshot of your financial health at one moment in time.
How do you calculate net worth?
There is one number that captures your entire financial life in a single figure, and it takes just two steps to find. Add up the value of everything you own, then add up everything you owe. The gap between those two totals is the number we are after:
Net worth equals total assets minus total liabilities.
Assets include cash, savings, investments, a home, and a car. Liabilities include your mortgage, car loan, student loans, and credit card balances. If your assets are worth $250,000 and your debts add up to $150,000, your net worth is $100,000. It can also be negative, which simply means you owe more than you own.
The Analogy
The scoreboard, not the paycheck
Net worth is like a scoreboard for your finances. Your salary is how many points you score this month, but net worth is the total score you have built across your whole life. Two people can earn the same paycheck yet have wildly different net worth, depending on how much they kept versus how much they owe.
What is the difference between net worth and income?
People often mix these up, but they measure different things. Income is a flow: the money coming in over time, like a monthly salary. Net worth is a stock: the total value you have accumulated at a single point.
A high earner who spends everything can have a low or even negative net worth. A modest earner who saves steadily and avoids debt can build a high one. That is why net worth, not salary, is the truer measure of financial progress.
How can you grow your net worth?
There are only two levers: increase what you own or reduce what you owe. Saving and investing grows your assets, ideally helped along by compound interest. Paying down loans shrinks your liabilities. Checking your net worth once a year shows whether you are actually moving forward, no matter how much you earn.
The TL;DR for Net Worth
At a Glance
- Net worth is total assets minus total liabilities.
- It is a snapshot of accumulated wealth, not your income.
- It can be negative if you owe more than you own.
- You grow it by increasing assets or paying down debt.