Net worth = Total Assets - Total Liabilities
It's the single most comprehensive snapshot of financial health. If you own $500,000 in assets and owe $200,000, your net worth is $300,000.
Example Calculation
Assets:
- Home: $400,000
- Retirement account: $150,000
- Investments: $80,000
- Car: $20,000
- Cash: $50,000
- Total assets: $700,000
Liabilities:
- Mortgage: $280,000
- Car loan: $15,000
- Credit cards: $5,000
- Total liabilities: $300,000
Net worth: $400,000
Why It Matters
Net worth is a better measure of financial health than income. Two people earning $100,000 annually:
Person A: Assets $500,000, Liabilities $100,000 = Net worth $400,000 Person B: Assets $50,000, Liabilities $200,000 = Net worth -$150,000 (negative)
Person A has built wealth; Person B is financially fragile despite equal income.
Tracking Progression
Tracking net worth annually shows wealth trajectory:
- Age 25: $50,000 (reasonable after student loan payoff)
- Age 35: $300,000 (building through work and investment)
- Age 45: $800,000 (peak earning and compounding)
- Age 55: $1.5 million (approach to retirement readiness)
If your net worth isn't increasing with age and income, your spending and saving strategy needs attention.
Components and Balance
Net worth isn't just about size but composition. $1 million in real estate provides less flexibility than $1 million in liquid investments. Healthy net worth should be diversified across asset types based on time horizon and goals.
