Definition of Net Worth

Net worth is the total value of an individual’s or business’s assets minus liabilities. It represents financial health and overall wealth by measuring what remains after debts are deducted from owned assets.

For example, if a person has assets worth $500,000 and liabilities of $200,000, their net worth is $300,000.

Purpose of Net Worth in Financial Planning

Net worth serves as a key financial indicator by:

• Measuring financial stability and progress over time.
• Helping individuals and businesses set financial goals.
• Determining creditworthiness for loans and investments.
• Identifying areas for debt reduction and asset growth.
• Providing a snapshot of overall financial well-being.

How Net Worth Is Calculated

Net Worth Formula

Net Worth = Total Assets – Total Liabilities

Example Calculation

• A person owns a home worth $400,000, has savings of $50,000, and investments of $100,000.
• They have a mortgage of $250,000 and a car loan of $20,000.
• Net Worth = ($400,000 + $50,000 + $100,000) – ($250,000 + $20,000) = $280,000.

This means they have a net worth of $280,000, representing their total financial equity.

Types of Net Worth

Personal Net Worth

• The total value of an individual's or household’s assets minus liabilities.
• Example: A person calculates their net worth by adding savings, property, and investments, then subtracting debts.

Business Net Worth (Equity)

• The total assets of a business minus its liabilities.
• Example: A company with $5 million in assets and $2 million in liabilities has a net worth of $3 million.

Liquid Net Worth

• The portion of net worth that can be quickly converted into cash.
• Example: A person’s stocks and cash savings are included in their liquid net worth, while their home is not.

Net Worth vs. Income

Feature	Net Worth	Income
Definition	Total assets minus liabilities	Money earned over a period
Stability	Can grow or decrease over time	Fluctuates based on employment and investments
Example	A person with assets of $1 million and no debt has a high net worth	A high-income earner with significant debt may have low net worth

Example: A person earning $100,000 per year may still have a negative net worth if they carry high debts, whereas someone with a lower income but substantial assets may have a high net worth.

Advantages and Disadvantages of Measuring Net Worth

Advantages

• Helps track financial progress and long-term wealth growth.
• Provides insights into debt management and asset accumulation.
• Assists in financial decision-making for investments and savings.

Disadvantages

• Market fluctuations can impact asset values and net worth.
• Does not account for income stability or cash flow.
• Some assets, such as property, may be difficult to liquidate.

Related Terms

• Assets – Resources owned that have economic value.
• Liabilities – Debts or financial obligations owed.
• Financial statement – A report summarizing financial position, including net worth.

Interesting Fact

Research indicates that individuals who regularly track their net worth are more likely to achieve long-term financial stability as they make informed decisions about savings and debt management.

Statistic

According to Statistics Canada, the median net worth of Canadian households was $329,900. Due to their real estate assets, homeowners have significantly higher net worths than renters.

Frequently Asked Questions (FAQ)

1. How often should I calculate my net worth?

It is recommended to calculate net worth at least once a year to track financial progress and adjust financial strategies accordingly.

2. Can net worth be negative?

Yes, if liabilities exceed assets, net worth is negative, indicating financial debt outweighs owned resources.

3. What affects changes in net worth?

Net worth can change due to asset appreciation, debt repayment, new investments, or major expenses.

4. Does net worth determine financial success?

While net worth is a useful indicator, overall financial success also depends on income, cash flow, and financial habits.

5. How can I increase my net worth?

Paying off debt, increasing savings, investing wisely, and reducing unnecessary expenses can help grow net worth over time.