What is net worth?

Just what is net worth all about, anyway? Let’s break down the meaning of this somewhat confusing term and what it means for you.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Entrepreneur on the phone.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

“What is net worth?” It’s a common question. We hear the term a lot, but it’s not always clear what it means. The good news is that it’s actually a fairly simple concept to understand – and it’s something you can grow. Here’s a rundown of everything you should know. 

What is net worth?

Basically, it’s the value of your assets once you deduct everything you owe.  

Your net worth can be made of many assets, including:

  • Cash
  • Investments
  • Pensions
  • Property
  • Cars
  • Valuables 

While debts can include:

Think of it this way: if you decided to sell everything you own tomorrow, the money you could get back is your net worth. 

How do you calculate your net worth?

Luckily, it’s simple to calculate.

  • List everything you own. 
  • Calculate how much each asset is worth. You might have a definite number, or you can use an estimate. 
  • List all of your debts. 
  • Deduct your debts from your asset total, and there you have it! 

Does it change every year?

It can, yes. Your net worth is just a snapshot of what you’re ‘worth’ financially at any moment in time. For example, once you’ve paid off some debt, it might increase. 

Essentially, it’s a useful measure of your overall financial health. If you don’t own much and you are accruing debt, it could be a sign that you need to budget better or start investing in your future. 

What’s the difference between net worth and income?

To be clear, they are not the same. Your income is just what you earn each year. You could earn £100,000 and rack up £200,000 in debts, so income doesn’t mean wealth.

Net worth, on the other hand, is what you’re actually worth financially at any given moment in time. 

  • A earns £50,000 per year but their net worth is £100,000. 
  • B earns £100,000 per year but their net worth is only £20,000. 

A has a greater net worth even though they earn less.

What’s a ‘good’ net worth?

There’s no right answer to this. It all depends on your personal circumstances. Generally, though, it’s good if your net worth grows rather than shrinks over time. 

  • It can increase with age, but not always. It depends on multiple factors including your spending habits. 
  • Don’t get too caught up on what you think you should have in the bank by a certain age. It’s never too late to build your wealth!

Is negative net worth a thing?

Yes. If you tally everything up and it turns out you have more debts than assets, your net worth is negative. Don’t panic, though. This is pretty common and it can happen at any stage in life. 

More importantly, it’s possible to turn a negative into a positive. 

How do I grow my net worth?

There’s no one-size-fits-all approach to this, but here are some tips to help you get started.

1. Start investing

Whether it’s opening a bank account or learning how to buy and sell shares, investing can help you grow your assets over time.

Spend a while researching your options and always get financial advice if you don’t know where to start. Remember that every investment carries some sort of risk.

2. Pay down debt 

It’s simple: if you pay down debt, you reduce your liabilities. Sure, it might be a slow process, but it’s part of the long game. Just pay off what you can afford when you can.

Another bonus? Paying off debt can help to boost your credit score

3. Spend wisely 

Some assets, like collectables and real estate, can grow in value over time. Other items, like clothes and furniture, can go down in value. Sure, you need to buy some disposable goods, but try to limit how much money you spend on these items.

You can put the extra towards, for example, your pension, savings or credit card debt.  

4. Boost your income

We know that income isn’t the same as net worth, but that doesn’t mean it’s irrelevant. Remember: the more you earn, the more you can put towards savings and investments. You could think about getting a side hustle or finding a way to make money online for more cash.

Takeaway

What is net worth? Well, think of it this way: it offers a useful snapshot of your financial health at any given time. If you need help calculating your net worth, check out an online calculator. And, if you’re worried about how much debt you have, contact Citizens Advice.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »