What is net worth?

Calculating your net worth

Your net worth is how much you're worth after subtracting the total amount of your liabilities from your assets. 

To calculate your net worth, add up the value of all your assets, such as your house, car, cash, possessions, and investments. Then subtract from that figure all of the liabilities you owe. These include bills, mortgages, credit card debt, and loans. The figure that you are left with is your net worth. 

By way of example, if the value of your total assets is $300,000 and you have $200,000 in total liabilities, your total net worth will be $100,000. Similarly, if you have assets of $100,000 and liabilities of $50,000, your net worth will be $50,000. 

What assets should you include? 

Your net wealth calculation should include your larger possessions, not every little thing. Generally, you should only count more significant assets that can be sold or quickly converted into cash. Your car is a great example. Your five-year-old couch, probably not. 

The following assets should be included in your net worth calculations, although your assets are not limited to these: 

• Real estate (primary residence, holiday homes, investment properties)
• Cars, boats and other vehicles
• Art, jewellery, and other valuable possessions
• Financial assets — shares, exchange-traded funds (ETFS),  bonds, etc.
• Businesses you own or have an ownership interest in
• Cash (savings accounts, cheque accounts, term deposits etc)

The value of most types of assets is based on opinion. For example, the only way to know the exact value of your house at a point in time is if you sell it. If you have an appraisal in hand, use it, but if not, remember to be realistic when valuing your assets to attain an accurate net worth calculation.

What liabilities should you include?

Unlike assets, liabilities usually have a definite value. If you owe $300,000 on your mortgage, that's the number you use when calculating your net worth. There are many forms of debt, but some common ones you should include in your net worth calculation are: 

• Mortgages
• Car loans 
• Bank loans
• Student loans 
• Personal loans
• Credit card debt

The total value of your liabilities will change over time as debts are paid off or taken on. Because total net worth is a point-in-time calculation, you should use the value of your debts at that point in time. 

What is a 'good' net worth? 

The definition of a 'good' net worth will differ depending on your point of view. Many variables contribute to net worth. For example, those who own their homes tend to have higher net worth than people who rent. Growth in the price of residential property has accounted for most of the household wealth growth in Australia since the COVID-19 pandemic started in 2020. 

The average Australian household had a net worth of $1.021 million in early 2022¹, but actual net worth varies widely across individuals. On a global scale, the variations in net worth are even more glaring. The wealthiest person in the world (currently Elon Musk) has a net worth of more than US$200 billion. 

What constitutes a high net worth can vary depending on who you ask. The ATO classifies those who control a net wealth of $5 million or more as 'wealthy individuals'². Those with a net wealth of $30 million or more are classified as 'high-wealth individuals'. The wealthiest person in Australia is currently Gina Rinehart, with a net worth of around US$14.8 billion. 

What is negative net worth? 

It is possible to have a negative net worth if the value of your liabilities is higher than your assets. In other words, the amount of debt you owe exceeds the value of the assets you own. This can occur when the value of your assets is eroded – a result of unexpected job loss, for example, a downturn in the property market or even a share market correction. 

Young people, particularly at the beginning of their working lives, can find themselves with a negative net worth. They may have taken on debt to study and hadn't sufficient time to earn money to build up their assets. This is not unusual or necessarily bad and is typically a temporary situation. 

Having a negative net worth later in life is more concerning. Still, provided you can recover over the short term, you may avoid such drastic measures as selling the house or applying for bankruptcy. Things like having a steady income can help rebuild a positive net worth. 

Why is knowing your net worth important? 

To get where you want to go in life, you need to know where you are. To improve your financial position, you need to understand what it is. 

Generating a personal net worth statement gives you an overview of your financial position at a point in time.  Over time, your net worth will change as you earn returns on (or deplete) your assets and your liabilities increase or decrease. Periodically calculating your net worth can help you stay on track in achieving your financial goal.

In a business context, net worth is one measure of the financial health of a business. It measures the value of an entity, providing a snapshot of its current financial position. In business, it is also known as book value, or shareholders' equity. 

Three ways to improve your net worth

A higher net worth means having more money to invest and generate returns. If you build a sufficient net worth, you can become financially independent, no longer reliant on employment to meet your living expenses. 

This means that working on building your net worth when you are young is essential to ensure a comfortable retirement. You can do a bunch of things to improve your net worth in the short and long term. Here are our top three suggestions: 

1. Wipe out high-interest debt 

High-interest debt (such as credit card debt) can be difficult to pay down. While you may not be able to pay the entire debt out all at once, if you only make the minimum repayments, you will be paying this debt – and its associated high-interest rate – for years to come. Focus on paying down as much as you can above the minimum amount. This will reduce the interest you owe, which can have a snowball effect over time. 

2. Up your superannuation contributions 

There are tax advantages to contributing to superannuation, which is an excellent method for increasing your net worth. Superannuation funds are treated advantageously for tax purposes, making them an ideal place to build your retirement account. Because of the favourable tax treatment of superannuation accounts, it's usually a good idea to maximise your contribution to them. Contributing to superannuation is saving for your future with extra tax benefits sprinkled on top. 

3.  Have money saved where it can grow 

If you have significant savings (beyond an emergency fund), you should carefully consider where to keep these funds. You will want to earn a healthy return on this money to maximise your net worth. Depending on your circumstances, there may be better ways of doing this than keeping the money in the bank. Consider an investment in the share market. The key is to reinvest any returns you make so they can continue to grow. 

How often should you calculate your net worth? 

There is no right frequency with which you should calculate your net worth. Some people find it beneficial to calculate their net worth quarterly. For others, annually is often enough. Net worth will fluctuate daily, especially as the value of assets moves through the economic cycle. The point of monitoring your net worth is to look for long-term trends and ensure you are heading in the right direction. 

Foolish takeaway

Net worth can apply to individuals, companies, corporate groups, and even states or countries. Pop culture fixations with net worth mean we are frequently exposed to lists of high-net-worth individuals. 

It is important to remember net worth is just one measure of value. It can change significantly over time, and you have the power to alter your net worth through your actions.