How net worth is calculated
Net worth is the most honest snapshot of your financial situation: Net Worth = Assets − Liabilities. Assets include cash, investments, retirement accounts, home value, vehicles and any resellable property. Liabilities cover everything you owe: mortgage, car loans, credit cards, student loans and any other debt. The result is what you would keep if you sold everything today and paid off every debt. It is the best long-term measure of financial progress: income comes and goes, but net worth compounds decades of decisions.
Worked example
Someone with $8,000 in checking, $35,000 in brokerage, $20,000 in a 401(k), a home worth $280,000, a $12,000 car, $210,000 mortgage balance, $9,000 car loan and $2,000 credit-card balance has $355,000 in assets and $221,000 in liabilities. Net worth is $134,000. Net liquidity (cash + investments − credit cards − car loan) is $32,000 — several months of expenses.
Common mistakes
- Overvaluing your home. Use a conservative appraisal or realistic market comp, not what you wish it were worth.
- Counting the car at purchase price. Vehicles depreciate — use Kelley Blue Book value or lower.
- Ignoring informal debt. Family loans and buy-now-pay-later count too.
- Confusing liquidity with net worth. High home equity does not pay the bills if you lose your job.
- Not revisiting. Recompute quarterly, or at least annually, to see the true trend.
Frequently asked questions
What is a "good" net worth for my age? A classic rule of thumb: net worth ≥ (age × annual gross income) / 10.
Do I include my 401(k)/IRA? Yes, but remember it is not fully liquid until retirement age.
What about expected inheritances? No. Only count what you already own.
Do personal belongings (furniture, clothes) count? Not meaningfully. Ignore unless it has a resale market (art, jewelry, collectibles).
What if my net worth is negative? Seeing it in black and white is the first step. Fix in order: emergency fund, expensive debt, then growth.