What does the term 'net worth' refer to?

The term "net worth" refers to the difference between total assets and total liabilities. This concept is crucial for understanding an individual's financial situation, as it provides a clear picture of their financial health. Assets include everything you own that has value, such as cash, investments, real estate, and personal property. Liabilities encompass all debts and financial obligations, including loans, credit card debt, and mortgages.

Calculating net worth is a simple yet powerful way to assess financial progress. A positive net worth indicates that an individual's assets exceed their liabilities, suggesting financial stability and security. Conversely, a negative net worth suggests that liabilities outweigh assets, indicating potential financial distress.

While total income, total value of real estate, and total expenditures contribute to an individual's financial picture, they do not directly measure net worth. Instead, they provide context for understanding income sources, asset accumulation, and spending habits, but the key focus for net worth is strictly the balance between assets and liabilities.