How is net worth calculated?

Net worth is determined by subtracting total liabilities from total assets. This represents the financial position of an individual or entity at a specific point in time. Total assets include everything of value that you own, such as cash, real estate, investments, and personal property, while total liabilities encompass all debts and financial obligations, such as loans, mortgages, and credit card debt.

By calculating net worth using this method, individuals can gain insight into their financial health. A positive net worth indicates that assets exceed liabilities, which is generally a sign of good financial stability. In contrast, a negative net worth suggests that liabilities surpass assets, which can be a red flag regarding one's financial situation.

This formula effectively captures the essence of personal finance, where understanding the balance sheet forms the cornerstone of financial planning and decision-making.