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APA Brock, T. J. (2021, November 12). Net Worth. Annuity.org. Retrieved December 8, 2021, from https://www.annuity.org/personal-finance/wealth-management/net-worth/

MLA Brock, Thomas J. "Net Worth." Annuity.org, 12 Nov 2021, https://www.annuity.org/personal-finance/wealth-management/net-worth/.

Chicago Brock, Thomas J. "Net Worth." Annuity.org. Last modified November 12, 2021. https://www.annuity.org/personal-finance/wealth-management/net-worth/.

Net worth is a measure of everything you own minus everything you owe to others at a certain point in time. An indication of overall wealth, net worth is comparable to the equity value reported by a company on its balance sheet (assets – liabilities = equity).

What Is Net Worth?

Net worth is a measure of individual or household wealth. This widely referenced calculation is a good indicator of financial strength and represents the monetary difference between the sum of your assets (the things you own) and the sum of your liabilities (the things you owe to others) at a given point in time.

When calculating your net worth, you must include all of your assets (bank balances, taxable investment accounts, 401(k)s and IRAs, homes, automobiles, collectibles, etc.) and all of your liabilities (home mortgages, auto loans, credit card debts, taxes payable, etc.). Mathematically, net worth is expressed as follows:

Net Worth Formula

Conceptually, net worth measures the cash you could generate if you were to sell off all your assets and pay off all your debts. The measurement is comparable to owners’ equity reported by a company; however, accounting guidelines can distort the comparison.

Evaluating Your Net Worth

Net worth is not a concept reserved for tech stock founders and real estate tycoons. Everyone has a net worth figure, and it’s a measurement we should all be familiar with.

That said, there is no magic net worth number to target. Rather, net worth should be monitored over time — with an understanding that a positive trend is more important than any one single measurement.

Ideally, your net worth should grow over time, assuming you can maintain or increase your gross income, reduce your debts and prudently invest discretionary income. The best way to drive growth is to maintain a disciplined budget, avoid unnecessary debt and implement a long-term investment program that reflects your risk-return profile.

Net Worth vs. Liquid Net Worth

While net worth is a comprehensive measure of overall wealth, many people, especially those in the financial services industry, focus on a more stringent metric: liquid net worth. This measurement only considers assets that are immediately accessible and readily convertible into cash.

Essentially, liquid net worth includes money held in bank accounts and publicly traded securities held in taxable brokerage accounts. The measurement excludes investments like your home, automobiles, collectibles and retirement accounts.

For most people, the exclusions above make their liquid net worth significantly lower than their overall net worth.

Classifications of Net Worth

Net worth is a very personal measurement, reflective of your own unique circumstances and personal finance decisions. As a result, you shouldn’t get too caught up in comparing your net worth to others’.

That said, people are curious, and we like to benchmark how we’re doing. Celebrity news reports and “world’s richest” lists fuel the fire. With this in mind, let’s take a look at some of the more common net worth classifications you may come across in the United States.

Median Net Worth

According to the Federal Reserve System, the median net worth for all family units in 2019 was about $122,000. This means that half of all families had a net worth above $122,000, and half had a net worth below $122,000.

High-net-worth Individual

High-net-worth individual (HNWI) is a phrase used in the financial services industry to describe a person whose liquid net worth exceeds a substantial, specified amount. While there is no official or legal threshold to be considered a HNWI, the mark is generally set at $1 million.

There are three levels to the HNWI classification scheme. The levels are as follows:
  • High-net-worth individual: $1 million to $5 million
  • Very-high-net-worth individual: $5 million to $30 million
  • Ultra-high-net-worth individual: Over $30 million

Accredited Investor Standard

According to the U.S. Securities and Exchange Commission (SEC), an accredited investor is an individual (or an individual with a spouse or spousal equivalent) who has a net worth of at least $1 million, excluding any primary residence. In lieu of this criterion, an individual can claim accredited investor status based on either of the following criteria:

  • Has earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably expects the same for the current year
  • Holds a Series 7, 65 or 82 license in good standing

Ultimately, the accredited investor designation helps identify investors who are “financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.” This distinction isn’t important to most people, but it can be highly beneficial to some, as accredited status allows for investment in unregistered securities offerings.

Negative Net Worth

In some cases, net worth can be negative. If your net worth is negative, you owe more than you own. Over the long-term, negative net worth is not a sustainable situation, but it’s fairly common for younger individuals who are just out of school or starting their careers.

These individuals tend to have relatively high debt loads, low earnings and no significant assets. Fortunately, through career advancement, earnings growth and improved wealth management strategies, those with negative net worth can reduce their debt loads and accumulate net worth over time.

Illustration of Net Worth

Now that we’ve covered the concept of net worth from a few different angles, let’s clarify things with a real word example. Assume Frank Sullivan, who is very diligent about tracking his personal finances, has the following assets and liabilities.

  • Frank has $5,000 in a checking account.
  • He has a Ford sedan with a fair market value of $20,000.
  • He has accumulated $50,000 in a high-yield savings account.
  • He owns a well-kept home with a market value of $300,000.
  • Frank has saved $500,000 in a taxable investment brokerage account.
  • He has also saved $500,000 in a tax-deferred 401(k) account.
Total Assets Example
  • Frank has $15,000 of debt associated with his Ford sedan.
  • He has a personal loan of $35,000.
  • He also has a mortgage on his home with a balance of $200,000.
  • Frank doesn’t have any other debt outstanding, but he estimates a deferred tax obligation of $100,000 on his investment holdings.
Total Liabilities Example

Based on the information above, Frank’s net worth is as follows:

Net Worth Example

Closing Thoughts

Net worth is a measure of your wealth. It is the difference between your total assets and total liabilities. Fundamentally, the measurement informs creditors and other parties of your financial strength.

While the calculation of net worth is simple on paper (total assets minus total liabilities), establishing an accurate figure for your finances can be very complex. This is because (1) the calculation requires a detailed awareness of all assets and liabilities, and (2) it entails the establishment of fair market values, which are often estimated.

To address these challenges, most financial experts recommend you keep a secure folder or electronic file with information about your financial assets and liabilities and update this file at least once a year. Furthermore, it’s recommended that you maintain a conservative stance with any estimates. Valuations can be tricky and unrealistic; low-end measures for assets and high-end measures for liabilities are best.

Gathering and organizing this information can be cumbersome, but it’s a wise move. Knowing your net worth and tracking it over time is essential to understanding your financial condition and planning for the future.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 12, 2021

4 Cited Research Articles

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  1. Corporate Finance Institute. (n.d.). Discretionary Income. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/discretionary-income/
  2. Federal Reserve. (2021, November 4). Survey of Consumer Finances (SCF). Retrieved from https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Net_Worth;demographic:all;population:1;units:median;range:1989,2019
  3. Investor.gov. (2021, April 14). Accredited Investors – Updated Investor Bulletin. Retrieved from https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3
  4. Investor.gov. (n.d.). Risk and Return. Retrieved from https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/risk-and-return