How is net worth defined?

Net worth is defined as the difference between total assets and total liabilities. This concept encapsulates an individual's financial position by providing a snapshot of what they own compared to what they owe. To determine net worth, one sums up all assets—such as cash, real estate, investments, and personal property—and then subtracts all liabilities, which include debts such as mortgages, student loans, credit card debt, and other financial obligations.

This calculation is essential because it helps individuals understand their overall financial health. A positive net worth indicates that a person has more assets than liabilities, suggesting financial stability and the potential for wealth accumulation, while a negative net worth reflects that liabilities exceed assets, highlighting potential financial difficulties.

In contrast, the other definitions provided do not encompass the broader and more comprehensive view of financial status captured by the net worth metric. For instance, merely counting the money in a bank account does not account for debts and other assets, while focusing solely on total liabilities provides an incomplete picture of one’s finances. Additionally, limiting the definition to liquid assets ignores other valuable resources that contribute to an individual's net worth.