Debt Dictionary

Net Worth

Investment Dictionary -> Net Worth

Net worth stands for the amount by which the assets exceed the liabilities. Serving as a way to determine the financial health, this concept can be used in view of individuals and companies. The formula for its calculation is simple and straightforward:

Net worth = Assets – Liabilities

Using this equation as a starting point, now it is time to determine your net worth. The calculation of your assets and liabilities is required in order to accomplish this process.

- Determining assets – Those of the assets that can be turned fast into cash or cash equivalents are called Liquid assets. Bank accounts, stocks, bonds, certificates of deposit, mutual funds, and other investments fall into the category. Your real estate holdings are a good example of illiquid assets. Vehicles, jewelry, and other holdings form a part of your private possessions that should be excluded. Though they may cost a lot, these items are probably not worth form a resale prospective.

- Determining liabilities –Your debts stand on the other side of the ledger. Falling into this category are car loans, credit cards, business loans, and home mortgages. This side of the equation presents particular interest given that many people find themselves in this kind of debt trouble.

A major role can be played by some mitigating factors. A college education, when compared with a high-school education, will typically double the net worth of the household. Self-employment, in contrast to working for an employer, may triple net worth.
As a result of such mitigating factors, in terms of its usefulness as a measurement instrument, the net-worth calculations are not considered universal.

The calculation of net worth is for your retirement savings like the GPS. It both tells you where you are now and gives you an idea what you should use to reach your destination.


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