how does net worth work


I have no idea what that means but I see it mentioned in politics and celebrities and like, everywhere

what is it, how is it calculated, what’s it good for

In: Culture

If you add up the current value of all of a persons assets, including cash, you’ll get their net worth. Edit: minus their debts.

Net worth is simply a measuring tool. Like the size of your house or how tall you are. It is a type of measure of your wealth (all your assets minus all your liabilities). It is a “theoretical” number by supposing what happens if you sold everything you own for cash and used it to pay off all your debt. What is leftover is your “net worth”. A positive net worth means you have some cash left, a negative net worth means you still owe money.

It is a rough measure of is A wealthier than B but is mostly useless in real life – since other factors like income, liquidity are more useful measures. Silly example: you own a mountain that has gold in it “worth” $100m dollars but you have no cash to buy your groceries. You cannot mine the gold nor can you really sell the mountain quickly. How useful is it that net worth?

Sell everything you own and use it to pay off all your debts. What’s left over is your net worth. It can be a negative number.

So sell your house, car, and cash out the 401k and maybe you have $1MM.

But you also have student loans, a mortgage from when you bought the house, and a tax bill from last year. Say that equals up $200k.

So you have a net worth of $800k.

It’s a good way to judge wealth. You can have a high paying job but a low net worth if you also have a lot of debts.

Similarly you can work at McDonald’s for minimum wage but if you somehow own a mansion free and clear that asset could give you a higher net worth than the ER Doctor with a ton of debt.

Add up all one’s assets and subtract their debts. The final number is net worth, and it’s a measure of one’s wealth.

Assets are cash in bank accounts, investments (stocks, bonds, mutual funds, ownership stakes in private companies, hedge fund or VC funds), real estate, valuable art & jewelry, cars, etc.

Debts are money owed, such as credit card debt, student loans, car loans, real estate mortgages, other personal loans.

So if you have $1000 in a bank account, $10,000 in investments, a car worth $10,000, and a home worth $250,000 but you owe $5,000 on your car loan, have $2000 in credit card debt, and owe $150,000 still on your mortgage than your net worth would be $114,000.

Often when you see a celebrity’s net worth mentioned, they are estimated based on their earnings rather than more exact numbers. We may know that a certain actor earned a total of $100 million from the films he starred in, but we know less about how much of that he spent… whether he blew it on $100k nights out on the town or whether he invested it in a startup that made him a ton of money.