Assets, Liabilities, and Net Worth
Plain English
An asset is something you own that has value (like a house or a savings account). A liability is something you owe (like a loan). Net worth is assets minus liabilities — a snapshot of your overall financial position at a point in time.
What is it?
An asset is something owned that has economic value — cash, investment accounts, retirement accounts, real estate, vehicles. A liability is an obligation owed to someone else — credit card balances, loans, mortgages. Net worth is total assets minus total liabilities.
Why does it matter?
Net worth is a broader picture of financial position than income alone. Someone with a high income and high debt can have a lower net worth than someone with a moderate income and few liabilities.
How does it work?
Calculating net worth means listing the current market value of assets, listing the current balance of liabilities, and subtracting. Because asset values (like home or investment prices) can change, net worth is a snapshot, not a fixed number.
Risks and limitations
Net worth can be skewed by illiquid assets (like a home) that can't easily be converted to cash without time or cost. It also doesn't reflect cash flow — someone can have a high net worth tied up in illiquid assets and still struggle with monthly cash flow.
Questions to ask a professional
How much of my net worth is liquid versus illiquid? Am I valuing my assets realistically, not optimistically?