In a Nutshell
A net worth statement shows the financial health of a business or individual by itemizing owned assets and liabilities. It’s good to have a positive net worth, which means you have more money than you owe. To calculate net worth, subtract your liabilities from your assets.Maybe you need to create a net worth statement for a new business idea, or you’re just curious about your financial situation. Whatever the reason, a net worth statement can provide an overview of your total financial worth, including your debts and assets.
- What is net worth?
- How to calculate net worth
- Which financial statement shows net worth?
- What’s next: Build your net worth
What is net worth?
Net worth shows the financial standing of a person. Your net worth is the sum of your assets — like your home equity, cash savings or investments — minus all your liabilities — like your mortgage balance, loans or debts.
Net worth is a better indicator of your financial health than your income alone, as it gives a complete and reliable picture of your finances. Your income doesn’t tell you how much debt you have, and a job loss or change in hours can quickly change your income.
For this reason, many individuals and companies use a net worth statement to check their financial standing. A net worth statement itemizes owned assets and liabilities and provides a total value or net worth.
You can have either a positive, negative or zero net worth.
Positive net worth
Having a positive net worth means you have more assets than liabilities. In other words, you have more than you owe. Having a positive net worth can be good since it means you have a financial cushion.
If you have a net worth over $1 million, you may qualify to become an accredited investor, according to standards set by the U.S. Securities and Exchange Commission. This status can open the world of private investing in early-stage companies.
Negative net worth
Negative net worth means you have more liabilities than assets. This means you have no financial cushion because you owe more than you have.
If you have a negative net worth, consider making a plan to get out of debt or otherwise reduce your liabilities to help restore your financial cushion.
Zero net worth
You have a net worth of zero if your assets are worth the same amount as your liabilities. While this means you don’t owe more than you have, you also don’t have any financial cushion.
If you have a zero net worth, consider building an emergency fund so you don’t have to sell any assets in case unexpected costs arise.
How to calculate net worth
To calculate your net worth, you simply need to subtract your total liabilities from your assets. Follow the steps below for a detailed breakdown of how to perform the calculation manually.
1. List your assets
To calculate your net worth, begin by listing your assets and their worth. An asset is any item that would have value in an exchange. For example, if you sold your car, would you be able to make any money? If so, your car is an asset.
Here is a list of assets you may want to include in your net worth calculation.
- Cash
- Checking accounts
- Savings accounts
- Money market accounts
- ABLE accounts
- Savings bonds
- Certificates of deposit (CDs)
- Stocks or mutual funds
- 401(k) accounts
- Individual retirement account (IRA) accounts
- Life insurance policies
- Cars
- Boats
- RVs
- Home value
- Jewelry
- Antiques
- Electronics
- Furniture
After listing your assets, add up their total worth. When calculating the combined worth of your assets, do not include any intangible assets, such as a college degree.
2. List your liabilities and debts
After totaling how much money you have (your assets), the next step in finding your net worth is totaling how much you owe (your liabilities and debts).
Liabilities and debts represent borrowed money you need to repay, typically with interest. Here are some liabilities and debts you should include in your net worth calculation.
- Credit card debt
- Layaway purchases
- Medical debt
- Bills that are past due
- A mortgage
- Auto loans
- Student loans
- Home equity loans
- Business loans
- Personal loans
- Cash loans
- Delinquent taxes
Add up the balances on your liabilities and debts to get the total amount you owe.
3. Run the numbers to get your total net worth
Once you know how much money you have in assets and how much you owe in liabilities, use the formula below to calculate your net worth.
Assets – liabilities = Net worth
Remember that the goal is to have a positive net worth, which means you have more than you owe. This allows you to have a financial buffer, which you can use in case of emergencies.
Which financial statement shows net worth?
The balance sheet is a common financial statement businesses use to show information about their assets and liabilities — in other words, their net worth. While typical for businesses, individuals may also keep personal balance sheets to view their net worth.
What’s next: Build your net worth
Because net worth is a measure of your assets and liabilities, there are two ways you can increase your net worth.
- Decreasing your liabilities
- Increasing your assets
If you have a negative net worth, it’s a good idea to focus on paying down debts. Getting out of debt can feel overwhelming, but a few strategies may help make the process faster.
For example, if you have several monthly debt payments, you may be able to save money by consolidating your debts with a balance transfer credit card or low-interest personal loan.
If you have a positive or zero net worth, you might opt to work toward increasing your net worth. Investing in your retirement funds or the stock market could be good options.