Which of the following best describes net worth?

• A. Total assets minus total liabilities.
• B. Total assets plus total liabilities.
• C. Liabilities minus assets.
• D. Assets minus income.

Answer: (A)

Net worth is the difference between what you own (assets) and what you owe (liabilities). It’s a snapshot of your financial position at a specific point in time.

Think of assets as things of value you own—cash, investments, real estate, vehicles, and other possessions. Liabilities are what you owe to others—mortgages, loans, credit card debt, and other obligations. Net worth is calculated by subtracting total liabilities from total assets. For example, if you have 500,000 in assets and 300,000 in liabilities, your net worth is 200,000.

Adding liabilities to assets would inflate the resources you actually have. Taking liabilities minus assets would yield the negative of net worth, which isn’t a correct measure of your overall wealth. Assets minus income mixes a stock value with a flow of earnings, which doesn’t reflect the amount you own outright after debts.