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Net Worth

Net worth is a term that measures how much wealth an individual or a company has. It is the sum of all owned assets minus the sum of all owed debts and liabilities. In personal finance, net worth is one measure of how financially healthy an individual is.

More Details on Net Worth in Personal Finance

An individual’s net worth is the value of their estate when they pass away. The current market value of all of the individual’s assets, such as stocks, real estate, life insurance policies, and owned possessions, all add to net worth. Likewise, all debts, such as credit card debt, mortgages, personal loans, and auto loans, are subtracted from an individual’s net worth.

Simply put, the equation “net worth = total assets – total liabilities” denotes how to calculate an individual’s net worth.

Net Worth Versus Liquid Net Worth

Liquid net worth only considers assets that can be quickly liquidated into cash and current liabilities, which are liabilities that are to be paid off within one year. 

An example of a liquid asset would be the balance of a checking account. An illiquid asset example is the house that a person owns and lives in. A current liability includes credit card debt, whereas a long-term liability is the mortgage on a house.

Example of Net Worth

Let’s assume a man named Adam has the following financial picture. He has a house valued at $300,000 with a $100,000 mortgage. He also owns a car valued at $20,000 with an $8,000 auto loan left on it. Adam also owns $10,000 worth of property and has a $3,000 personal loan.

The sum of Adam’s assets is $300,000 + $20,000 + $10,000, which equals $330,000. The sum of his liabilities are $100,000 + $8,000 + $3,000, which equals $111,000.

Since the equation to determine net worth is “total assets minus total liabilities,” Adam’s net worth can be calculated by subtracting $111,000 from $330,000. This gives Adam a net worth of $219,000.

Three years pass, and let’s assume Adam pays down $40,000 of his mortgage, $7,000 of his auto loan, and pays off the personal loan completely. We’ll also assume that his house is now worth $350,000, and his car depreciated to $14,000.

With these new numbers, Adam’s net worth is now $374,000 minus $61,000, or $313,000. In three years, Adam’s net worth has increased by $94,000.

What is Negative Net Worth?

Negative net worth is when an individual has more liabilities than they do assets. For example, if someone has more credit card debt, auto loans, and a mortgage than they do the total value of everything they own, then they have a negative net worth.

Negative net worth means that an individual needs to focus on paying down debt and acquiring more assets, whether that be cash in a bank account or investments such as stock shares. Initially, the individual would do best to pay down as much debt as possible, and that can be done by creating a budget and tracking spending to then identify ways to save money. 

The individual can also create an emergency fund as a priority to help mitigate the chance of them sinking further into debt from an unexpected expense.

Net worth is a term that measures how much wealth an individual or a company has. It is the sum of all owned assets minus the sum of all owed debts and liabilities. In personal finance, net worth is one measure of how financially healthy an individual is.

More Details on Net Worth in Personal Finance

An individual’s net worth is the value of their estate when they pass away. The current market value of all of the individual’s assets, such as stocks, real estate, life insurance policies, and owned possessions, all add to net worth. Likewise, all debts, such as credit card debt, mortgages, personal loans, and auto loans, are subtracted from an individual’s net worth.

Simply put, the equation “net worth = total assets – total liabilities” denotes how to calculate an individual’s net worth.

Net Worth Versus Liquid Net Worth

Liquid net worth only considers assets that can be quickly liquidated into cash and current liabilities, which are liabilities that are to be paid off within one year. 

An example of a liquid asset would be the balance of a checking account. An illiquid asset example is the house that a person owns and lives in. A current liability includes credit card debt, whereas a long-term liability is the mortgage on a house.

Example of Net Worth

Let’s assume a man named Adam has the following financial picture. He has a house valued at $300,000 with a $100,000 mortgage. He also owns a car valued at $20,000 with an $8,000 auto loan left on it. Adam also owns $10,000 worth of property and has a $3,000 personal loan.

The sum of Adam’s assets is $300,000 + $20,000 + $10,000, which equals $330,000. The sum of his liabilities are $100,000 + $8,000 + $3,000, which equals $111,000.

Since the equation to determine net worth is “total assets minus total liabilities,” Adam’s net worth can be calculated by subtracting $111,000 from $330,000. This gives Adam a net worth of $219,000.

Three years pass, and let’s assume Adam pays down $40,000 of his mortgage, $7,000 of his auto loan, and pays off the personal loan completely. We’ll also assume that his house is now worth $350,000, and his car depreciated to $14,000.

With these new numbers, Adam’s net worth is now $374,000 minus $61,000, or $313,000. In three years, Adam’s net worth has increased by $94,000.

What is Negative Net Worth?

Negative net worth is when an individual has more liabilities than they do assets. For example, if someone has more credit card debt, auto loans, and a mortgage than they do the total value of everything they own, then they have a negative net worth.

Negative net worth means that an individual needs to focus on paying down debt and acquiring more assets, whether that be cash in a bank account or investments such as stock shares. Initially, the individual would do best to pay down as much debt as possible, and that can be done by creating a budget and tracking spending to then identify ways to save money. 

The individual can also create an emergency fund as a priority to help mitigate the chance of them sinking further into debt from an unexpected expense.