Financial experts and talking heads on TV frequently use industry-specific terms or jargon that can be confusing to listeners. Getting the 411 on the vocabulary used in personal finance helps you understand what experts are saying and make sense of your own financial situation. "Net worth" is a term used in personal finance that describes your total wealth.
Net Worth Basics
Net worth is the total value of all the money you have and the assets you own, minus all of your debts. For example, if you have $10,000 in a savings account, $50,000 in a retirement account and a home that is worth $140,000 you have $200,000 in total assets. If you owe $100,000 on your mortgage, $20,000 on student loan debt and $5,000 on credit cards, your net worth is $200,000 minus your total debt of $125,000, or $75,000. Net worth is a common measurement of wealth. For instance, a millionaire is often defined as someone whose net worth is $1 million or more.
Negative Net Worth
Since net worth is equal to total assets minus debts, it is possible to have negative net worth. Young people that are just starting out often carry substantial amounts of student loan debt, credit card debt and personal loans. If your total debt is greater than your savings and other assets, you have negative net worth. Paying off debts faithfully, avoiding new debts and committing extra money to savings can help those with negative net worth achieve positive net worth.
Net Worth and Retirement
Net worth is an important consideration in retirement planning, since you do not have the income from a job after you retire to increase your net worth. Retirement planning is often centered on building up enough net worth so that you can live the type of life you want without running out of assets before you die. Recurring income sources such as Social Security payments, pensions and annuities can help keep you from using up your savings too quickly during retirement.
Growing Net Worth
Retiring the way you want may depend on your net worth at the time that you stop working, so it is essential to grow net worth during your working life. Investing money in assets that have the potential to increase in value, like stocks, mutual funds and real estate, is a common strategy for building net worth. Saving money in bank accounts that pay interest is another way to build net worth. It is possible to lose money when you invest if the value of your investment goes down, but many people still prefer investing to saving money at a bank because investing offers the possibility of gaining more wealth more quickly and keeping up with inflation. According to CNN, stocks have returned close to 10 percent a year on average since the end of World War II. The average rate of return on savings accounts was less than 3 percent over the last 20 years.
- The Free Dictionary: Net Worth
- USA Today: Many Households Have a Negative Net Worth, Study Finds
- Yahoo Finance: First Person -- From Negative Net Worth to Financial Security
- CNN Money: Wealth of 1.8 Million Americans Tops $2M
- CNN: Tips for Investing in Stocks
- Bankrate.com: Historical Chart of Savings Rates: 1987-2005
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.