Your net worth

Many people find financial terms confusing and sometimes even intimidating. But understanding these concepts is easier than you probably think — and very important. One financial term you'll encounter again and again, whether you're applying for a line of credit, trying to arrange a mortgage or requesting financial aid for college, is your net worth. Everyone has a net worth, and calculating yours is simple.

Figuring your net worth

Calculating your net worth involves looking at a detailed picture of your finances. To figure it out, you add the value of the assets you own and then subtract your liabilities, or what you owe in loans and other obligations. The amount that remains is your net worth.

Assets

• Cash reserve assets include the money in your checking, savings and money market accounts, as well as CDs and Treasury bills
• Investment assets are securities like stocks, bonds and mutual funds, and any other investments that generate income or may grow in value
• Personal assets are your valuable possessions, like art, cars, antiques or jewelry
• Retirement accounts include the money you have saved specifically for retirement (which you haven't accounted for in cash reserve assets or investment assets above), such as employer-sponsored 401(k) plans
• Real estate is your home and any other property you own

Liabilities

• Short-term debts are the bills you currently have, like credit card charges, personal loans, income and property taxes, and insurance
• Long-term debt are loans on which you make installment payments over a long period of time, like a mortgage or college loan

If your assets are greater than your liabilities, then you have a positive net worth — and usually a much better chance of being approved for a loan should you need one.

If your liabilities are greater than your assets, you have a negative net worth, and your first goal should be to reduce your debt.