Net worth is the total value of the assets owned by a private individual or organization, such as a business, minus all of their liabilities.

How to Calculate Net Worth

• Add Up Your Assets
• Add Up Your Debts
• Subtract Debts from Assets

In his groundbreaking book Rich Dad, Poor Dad, Robert Kiyosaki presented very simple definitions for assets and liabilities: assets put money into your pocket, while liabilities take money out of your pocket.

What’s thought provoking about this definition is that it reframes the typical perspective that a person’s own residence is an asset. Between the mortgage, insurance, taxes, and costs of upkeep and repair, a personal residence is actually a liability on a monthly basis. Nevertheless, when calculating one’s net worth in terms of personal finance, the real property of their home will almost always be listed as an asset—unless the outstanding debt of their mortgage is greater than its value.

That does happen from time to time, and it has happened to a lot of people when the real estate bubble popped in the subprime mortgage crisis of 2008. Other typical liabilities in terms of personal finance include credit card debt, student loans, and vehicle loans. With all these total liabilities to consider, you may be wondering if your total net worth is anything to write home about…

What is Net Worth?

Net worth is the dollar value one arrives at after subtracting these aforementioned liabilities from the total assets. Assets, in terms of personal finance, would likely include the balance in a bank account, like a checking account or savings account; along with the market value of securities like stocks, bonds, ETFs; and shares of mutual funds in a brokerage account or retirement account. Collectibles, jewelry, and the market value of vehicles, like a car, truck, or boat, can also be considered assets in terms of calculating personal net worth.

Net worth is not just a consideration for individuals and families. Businesses also have to figure out a net worth formula using a balance sheet, known as a net worth statement. The resulting number from this net worth calculation is also known as book value, or in the case of publicly traded companies, shareholder’s value. Just as it is with the personal finance net worth calculation, the business will subtract its current liabilities from its net assets, which is different from net income. In many cases, the business will not use the current market value of an asset to determine its current net worth, but rather a book value that reflects an industry standard and perhaps factors in depreciation. Analysts will use such a net worth worksheet to determine the overall financial health of a company, which is important for investors and lenders to consider.

Both in terms of a business and in terms of personal finance, the wealth of a positive net worth is important, because it corresponds to how well a person or organization can meet their financial goals or respond to financial crises.

What is the Average American Net Worth?

The average net worth of American families is surprisingly high, at around $748,880. More often than not, this household net worth is a reflection of a financial situation where retirement savings and real property are the most sizable financial assets, while a car loan, mortgage, and student loan debt represent the largest components of total liabilities.

The median net worth is much lower, at $121, 760. This represents a more accurate picture of the middle class, since the average household net worth is inflated by high net worth individuals.

The median net worth number is concerning because it illustrates that not even real property and retirement savings can combine to create a number significantly higher than a typical mortgage. The picture is even more grim when considering that $121,760 is not enough to fund more than a few years of retirement.

For all these reasons, it’s important to think about building wealth to increase your estimated net worth. It’s so much more than a number reflecting how much you have; net worth essentially reflects the degree to which you can meet personal and financial goals.

What is Liquid Net Worth?

Liquid net worth refers to what your net worth would be if you turned your liquid assets into cash and/or used them to pay off your outstanding liabilities (that is, your debts). Liquidity refers to how quickly an asset can be turned into cash.

Though cash is certainly the most a liquid asset, stocks and bonds can be liquidated relatively quickly too. Real estate cannot be liquidated quickly, so it’s not typically an asset class that can be factored into liquid net worth. Liquid net worth measures your ability to respond to a financial crisis, such as a large, unexpected expense. By contrast, net worth is a better gauge of your overall financial health.

How to Calculate Net Worth

Now that we’ve explained what net worth is and gone over the net worth of an average American, let’s talk about how to calculate your own net worth:

1. Add Up Your Assets

Add up all your assets, including real property, cash, cash in savings, and the market value of any brokerage or retirement accounts. Rental properties should be considered in addition to your primary residence.

Don’t ignore collectibles, art, and jewelry. You’d be surprised by the value of certain items that accrue on the market—baseball cards and vintage toys are excellent examples. If you’re curious about the value of these items, you can have them assessed professionally, or you can look at a site like eBay to see how much they have sold for in the past, in order to determine a rough market value.

Once you have factored in all your assets, add up the market value of these items (because that’s the value for which they could be liquidated). In some cases, this may differ from other values associated with your asset. For example, it’s likely that the assessed value of your home, for tax purposes, is actually much lower than its market value.

Do you own a business or real estate? Join our Asset Protection workshop for expert strategies on tax reduction and wealth preservation.  

2. Add Up Your Debts

Now it’s time to add up your debts. Not the monthly payments, but the total amount of outstanding debt you have. You can call your lender and ask what the payoff amount is for each debt, which in some cases will differ from the amount listed on your statements.

If you just want a ballpark number, it’s much easier to calculate based on the monthly bills sent by your lenders each month. However, calculating the true value of these debts will require more effort, because as mentioned, you really need to call to get a true sense of the actual dollar value of the debt. Typical debts for most consumers include a mortgage, credit card debt, student loans, personal loans, a HELOC (home equity line of credit), and other forms of debt that need to be repaid. If you are renting your property, that monthly payment should not be factored into your net worth.

Similarly, monthly bills, like those for your utilities, might seem like a liability in terms of calculating net worth, but they are not. This is because the items factored into the net worth equation need some sort of market value. Debts, such as credit card debt, mortgages, and student loans, do have a market value because they generate income for the lender with interest. Financial institutions buy and sell debts. Bills tied to services, such as utility payments and subscription services, however, do not carry any inherent value. Moreover, the individual making these payments always has the option of severing these expenses from their spending, something they do not have the option of doing with personal debt unless they file for bankruptcy.

3. Subtract Debts from Assets

Now, all that’s left to do is subtract your debts from your assets. Hopefully this yields a positive number. Though if it doesn’t, you have what’s known as a negative net worth. That may not seem like a problem if your income is covering your expenses every month, but eventually the risk may catch up with you.

For instance, major medical emergencies and life events, like marriage and birth, cost a significant amount of money out of pocket. You might have to liquidate some of your assets in order to cover the associated expenses.

But what if you don’t have any assets? Unfortunately, many Americans find themselves in this situation because inflation and the costs of education have skyrocketed past wages. The solution to this problem for most American families is to have both adults working, but sadly, this rarely makes a sizable difference. Exploring alternative solutions, such as passive income from rental properties or other forms of residual income, might be a great way to build your assets and cash flow.

Popular Celebrity Net Worth

The following individuals are a few of the most public, high net worth individuals (HNWI) in the world:

• Jeff Bezos: $194.4 billion
• Elon Musk: $184.4 billion
• Bill Gates: $132 billion
• Donald Trump: $2.4 billion
• Kanye West: $1.8 billion
• Tiger Woods: $800 million
• Lebron James: $500 million
• Queen Elizabeth II: $500 million
• Serena Williams: $210 million
• Nancy Pelosi: $120 million
• Britney Spears: $60 million

Net Worth is Important, But It’s Not Everything

Is net worth everything? As you might guess, the answer is no. For example, the Queen of England, listed above, has a net worth less than one percent of Jeff Bezos—but the Queen of England is also the head of state of 15 different countries, with the power to dissolve the legislatures in these countries.

On a more personal level, having a significant amount of net worth does not necessarily make you a better human being. And yet, at the same time, net worth is important for everyone to consider. A positive net worth can help you get a loan or credit when you need it. Positive net worth, especially liquid net worth, also indicates your ability to respond to a financial crisis. And even if you don’t feel the need to consider it on a daily basis, one day you will. That’s because the nest egg you accrue during your working years, which is a significant part of the net worth for most Americans, will one day cover your daily expenses in retirement.

If you’re looking for ways to increase your net worth, we encourage you to join our Infinity Investing workshop! Our financial experts will help you develop a simple plan to gain financial independence.