Our Net Worth Definition

At the time we wrote this page, plugging "net worth definition" into Google turned up 14 different definitions, plus one about a movie with the name Net Worth. It's no wonder some people are confused by the different definitions of net worth found in the financial literature.

What it boils down to is this: your net worth is a snapshot of your financial condition at any point in time. This balance sheet could change tomorrow, and it will definitely change next month.

To calculate your net worth, simply subtract all your liabilities from all your assets. The balance is your net worth.

If the balance is negative (you have more liabilities than assets), you have a negative net worth, and are definitely in trouble financially. Go to Increase Your Net Worth for a discussion of several ways you can reduce your liabilities and increase your assets to turn your negative into a positive net worth and then keep on growing it.

Assets

Some of the confusion lies in what we consider assets. To most financial experts and teachers, an asset is anything that can be sold. So a car is an asset, as is a house. Silver and gold coins are assets, as is cash in your wallet and in your bank accounts, plus a business and investments. Assets are also know as your equity.

However, Robert Kiyosaki, the author of Rich Dad, Poor Dad and several other best-selling financial books, believes that some of what we call assets are actually liabilities.

He believes that our houses/condos, plus our cars, boats, snowmobiles, RVs and other similar items are all liabilities. Why? Because they depreciate in value and they earn no income for us. In other words, they take money out of our pockets every month until they're paid for. At that point, they can become real assets, but greatly diminished assets due to depreciation.

Liabilities

Liabilities are anything that you owe money on. Food and utility bills are not normally liabilities as they are not anything you owe money on. They are, instead, expenses (unless you pay them on a credit card that carries an unpaid balance—then they become liabilities).

Liabilities include mortgages, car payments, credit card debt, lines of credit with outstanding balances, and school loans. As you may have noticed, our lists of liabilities are usually longer than our lists of assets, especially if you view assets the way Kiyosaki does.

The Bottom Line

Ultimately, any net worth definition boils down to simply assets minus liabilities. It's up to you to decide whether you include your house, car and "toys" as assets, or exclude them from the list.

Once you know where you are now, and where you want to be in one year, five years, ten years and longer, you can develop a plan that will get you to where you want to be—financially secure.