What is net worth?

What does net worth mean?

When working toward financial goals, it’s essential to have a reliable method for tracking your financial health. Although salary is often a primary indicator of financial success, it only tells part of the story. Net worth offers a more complete view by accounting for both what you own (assets) and what you owe (liabilities). It’s possible to earn a high salary yet have a negative net worth, just as it’s possible to build a positive net worth on a modest salary.

A positive net worth means that the value of what you own is greater than the debts you owe, suggesting strong financial health. Conversely, a negative net worth means your debts outweigh your assets. While this may seem concerning and may warrant adjustments in spending, it is not uncommon nor is it the end of the world, depending on your life stage and whether your debt is good debt or bad debt.

How to calculate net worth

Calculating net worth is quite simple. Just subtract the amount you owe (your liabilities) from the value of the things you own (your assets). 

Assets — Liabilities = Net Worth

First, create a detailed inventory of all your property and determine the total value of these assets. Next, compile a list of all your outstanding debts. Finally, subtract your total liabilities from your total assets. The resulting figure is your net worth.

What does net worth include?

When calculating your net worth, it’s important to know what to include in the assets and liabilities categories.

Assets

Although everything you own could be considered an asset, only items that would yield value if sold should be considered in your net worth calculation. Generally, personal items like clothing, furniture, and small household items are not included.

For personal net worth, assets fall into two main categories: fixed and liquid.

Fixed assets include:

• Homes
• Land
• Vehicles
• Valuable collectibles (e.g., art and jewelry)

Liquid assets include:

• Cash
• Stocks
• Bonds
• Mutual funds

Related: Learn more about cash value life insurance

Do retirement funds count as net worth?

Retirement accounts are part of your net worth. Usually composed of stocks, bonds, and other investments, these savings vehicles provide tax advantages, help build your current net worth, and provide for your living expenses in the future.

Do insurance products count as net worth?

The cash value of annuities, universal life, and whole life insurance policies are not considered liquid assets. Most annuities have surrender periods, early withdrawal penalties, and ta implications if accessed before age 59½ and liquidity depends on the annuity type and contract terms. Similarly, the cash value of insurance policies is only partially liquid. Accessing the cash value may involve processing time and administrative fees. Taking possession of the cash value could also result in tax consequences, incur interest charges or reduced death benefits. Not all policies allow loans or withdrawals and terms vary.

Liabilities

When figuring out your net worth, liabilities include all debts owed, such as:

• Mortgages
• Student loans
• Car loans
• Credit card debt

The importance of net worth

Net worth offers a snapshot of your financial health and is a key factor used by banks and lending institutions to assess loan eligibility. Regularly monitoring your net worth is vital for staying on track to reach your financial goals and gauging your resilience to economic downturns.

How to improve your net worth

Having a positive net worth is critical to your financial health. Here are several strategies to help you improve it:

• Create a budget. Develop a budget that accurately reflects your income and expenses. This will help you spend within your means and allocate funds more effectively.
• Build an emergency fund. Set aside money for unexpected expenses. An emergency fund is crucial for maintaining financial stability. It can help you avoid the need to borrow money for emergency circumstances, preventing the accumulation of an added interest liability.
• Reduce your expenses. Temporarily cut back on nonessential spending to build savings and pay off debt more quickly.
• Reduce your debts. Paying off debt is a major boost to improving net worth, and paying debt off early reduces the effects of compounding interest, saving you money in the long run.
• Maximize your savings. Investing in stocks, bonds, and mutual funds provides an opportunity to receive higher returns¹ compared to ordinary savings accounts, and tax-advantaged retirement accounts like 401(k)s and IRAs allow you to deduct the contributions from your taxable income to defer taxes².

With careful monitoring and strategic action, you can build a healthy net worth.

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¹Investments are subject to market risk, including the potential loss of principal.

²Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.