What is net worth? | Financial goals | Financial Literacy | Khan Academy

In this video, we're going to talk a little bit about net worth. So, let's just start with a question: if someone told you that they are worth $100,000, what does that mean to you? What do you imagine?

So, let's think about it together. Let's say we have someone, and let's think about the things that they own that have value. So, let's say that they have a house, and the house is worth $500,000. $500,000. Let's say that they also have a car, and let's say that that car is worth $50,000. We could think of other things here; maybe they have jewelry. So, jewelry, let's say that that is worth $5,000. I'll keep it simple just for the sake of this video.

So, if you add up all of these things, what would it come up to be? Well, this is $555,000. So, $555,000. And so, you'd say the total amount of things of worth that this person has is $555,000. Sometimes this is referred to as total assets. Assets are the things that have value to them that will give you future benefit as well.

So, you'd say, "Okay, total assets are $555,000." Is this person worth $555,000? Or maybe I should say, is their net worth $555,000? Pause this video and think about whether we're missing anything.

Well, some of you might have said, "Well, it's great that this person has this stuff, but maybe they also owe things." So, this side I just took a catalog of assets, but then there's the other side of the equation which we can call liabilities. These are things that you owe to other people or that might cost you in the future.

So, let's say that house might be $500,000, but let's say that there is a mortgage on that house, which is a loan to buy that house, of $400,000. So, this person owes $400,000. Let's say there's a car loan; car loan of, well, let's make this—I'll make this about $40,000. Here I see a pattern that’s forming in my subconscious mind.

And let's say there's normally not what I would call a Jewelry Loan, but let's say that there is credit card debt. I'll just say CC debt for credit card debt of, let's say, $15,000. So how much in total does this person actually owe? I'm going to add more to this. Let's say that this person also has student loans. Student loan; let's say that that is another $50,000.

So, how much does this person owe? Well, here we would calculate total liabilities. Liabilities: $400,000 + $40,000 is $440,000, + $15,000 is $455,000, + $50,000 is $505,000. So, now what would you think this person's net worth is?

Well, to figure out net worth, let me write it over here. Net worth. And the word "net" here is a clue. You're thinking about not just how much do you have, but net of what you owe. So, what we really want to say is this is going to be total assets minus total liabilities, which in this scenario is $555,000 (555K) minus—switching colors a lot—minus $505,000 (505K), which is going to be equal to— is equal to $50,000.

So, even though this person has a lot of assets—over half a million dollars in assets—here, their net worth is $50,000 because we subtracted out all the things that they owe. This is at least a positive net worth, but you could imagine scenarios where people have a negative net worth.

You could imagine a lot of recent college grads; they haven't bought a house or a car, but they might have some student debt. Their student debt might be more than all of the assets combined, or at least the assets that you can buy or sell. We can make arguments that your education is a very powerful asset that will give you future benefit, but things like that are normally not considered when you think about net worth.

So, you can have a positive net worth, and you want to have as positive a net worth as possible within reason, but you can also have a negative net worth. But hopefully, you can turn it positive over time.

Now, another related idea: sometimes people talk about personal inventories where you list out all of the things you own. This might be a relevant thing, and you might even list more things than this—your computer, your TV set, etc., your appliances. That might be useful for things like insurance so that if you get robbed or, heaven forbid, your house burned down, that the insurance company can reimburse you for some of those losses.

So, that's kind of a related idea, but in general, if we're talking about net worth: your assets—what has value—minus your liabilities, the things that you owe.