How is net worth calculated?

Net worth is calculated by determining the difference between total assets and total liabilities. This means that net worth reflects the value of what you own compared to what you owe. Total assets include everything of value that an individual or entity possesses, such as cash, real estate, investments, and personal property. Total liabilities encompass all debts and obligations, such as loans, credit card balances, and any other payable accounts.

When you take the total value of assets and subtract total liabilities, the result provides a clear picture of financial health, indicating whether an individual is in a positive net worth situation (more assets than liabilities) or a negative one (more liabilities than assets). This calculation serves as a foundational aspect of personal finance and helps individuals assess their financial progress and plan for future goals.

The other options provided do not define net worth correctly. For example, adding total liabilities to total assets would not yield net worth but rather a combined total without showing the relationship of assets to liabilities. Subtracting total expenses from total income calculates cash flow rather than net worth. Estimating future earnings from investments is a projection that doesn't factor in the current financial position represented by net worth.