What Is Net Worth?
Your net worth refers to how much more your assets are worth than your liabilities. In short, your net worth is how much money you would have if you sold everything you own and used the proceeds to pay off your debts, explains personal finance blogger Trent Hamm in the Christian Science Monitor. If the money wouldn't be sufficient to pay off all your debts, you have a negative net worth.
Assets refer to anything you have that has a monetary value. These include your house, car and personal possessions like clothing, baseball card collections or electronics. For example, if you could sell your laptop for $350, that increases your net worth by $350.
Liabilities are amounts that you owe to other people or entities. These can include installment loans like student loans, mortgages or personal loans, as well as revolving debts like your credit card balances. For example, if you have a $100,000 mortgage, $20,000 in student loans and $5,000 in credit card debt, you have $125,000 in liabilities. Limitations of Net Worth Your net worth might tell you how much money you have, but it doesn't necessarily guarantee that you can access enough of it to pay your bills as they come due. Some assets, like the value of your home or money in your retirement accounts, aren't easily or cheaply turned into cash you can use to pay bills. Therefore, you also need to make sure you have enough cash (or assets you can convert to cash) to pay your debts as they come due.
Tracking Your Net Worth Over Time
While knowing your net worth at any given time can be useful, you should also track how your net worth changes over time. If you use software like Quicken to manage your income and expenses, you can see how your net worth increases as you progress toward your financial goals. Or, if you're missing your targets, you can see what changes you can make to make your financial dreams a reality.