Net Worth

Almost certainly, you have heard the term “high net worth individual” bandied about almost every day. But do you understand what net worth really means?

In simplest form, net worth is defined as the difference between the value of what you own—your assets—and the amount that you owe—your debts. If you sold everything you own, and paid off all your debts, it’s the amount of cash you’d have in your back pocket, in simplest terms.

Basically, net worth is just a way of describing and measuring how wealthy you are. Knowing your net worth is an important first step in figuring out your financial goals and building your long and short term financial plans. Overall, your financial goal should be to increase your net worth over time.

Obviously, to calculate net worth, you need to subtract what you owe from what you own. In order to figure out what you own, however, you need to know what the various kinds of assets are.

The first type of assets to consider is tangible assets. In other words, tangible assets are your stuff. Your house, if you own it, your vacation home, if you have one and own it, your car or cars and other vehicles, any rental properties you own, and your art, jewelry and other valuables. Generally, it’s only worth what someone would pay for it, so if you think something like your DVD collection is really cool it’s still only worth what someone would pay for it on eBay.

The next type of assets are equity assets. These are things like stocks, variable annuities, limited partnerships, and business interests. They can be things that generate income like stocks, or things that represent an ownership stake in the successful outcome of any business, such as business interests. From a net worth point of view, though, what matters isn’t projected income but the asset’s worth at the moment of calculation.

Fixed principal assets are things like trust deeds, fixed dollar annuities, and other fixed principal assets. Fixed rate assets are things like government bonds and securities, municipal bonds, corporate bonds face amount certificates, and also debt mutual funds. Cash and check equivalents include your checking accounts’ balances, your savings accounts, your money market funds, your certificates of deposit, and other cash reserve accounts.

There are various types of liabilities as well. For example, there are home mortgages or other mortgages. A mortgage is a very specific type of secured debt. Automobile loans are another type of secured debt. Bank loans and personal loans may be secured or unsecured, depending on whether you had to put up collateral to get them. Last, there’s unsecured debt—that’s debt which you didn’t have to offer any assets as collateral to take out, such as credit card debt.