Net Worth
The total wealth of an individual or entity, calculated as the sum of all owned assets minus the sum of all liabilities.
Net Worth is the ultimate mathematical snapshot of an individual's or company's financial health. While income (your salary) dictates how much money flows into your bank account, your net worth measures how much of that money you actually keep and grow.
The Formula
The formula for calculating net worth is brutally simple:
Net Worth = Total Assets - Total Liabilities
- Assets are everything you own that has monetary value. This includes cash in the bank, stock portfolios, real estate equity, mutual funds, and vehicles.
- Liabilities are everything you owe. This includes credit card debt, student loans, outstanding mortgage balances, and personal loans.
Why it Matters
Many people confuse high income with high net worth. An individual earning $200,000 a year who spends $210,000 a year on luxury cars and expensive rent has a negative net worth. Conversely, someone earning $60,000 a year who aggressively saves and invests in index funds for 20 years can easily build a net worth in the millions. Tracking your net worth is the single most important metric for achieving financial independence.