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Does Net Worth Include Debt?
by
JG Wentworth
•
September 26, 2024
•
7 min
Understanding your net worth is a crucial aspect of managing your personal finances. However, many people are unsure about how debt factors into this calculation. This article aims to provide a clear explanation of net worth, how debt is included in its calculation, and why this matters for your overall financial health.
What is net worth?
Net worth is a financial metric that provides a snapshot of your financial health at a given point in time. It’s calculated by subtracting your total liabilities (what you owe) from your total assets (what you own).
The formula for net worth is: Net worth = total assets – total liabilities
Does net worth include debt?
The short answer is yes, net worth does include debt, but not in the way you might initially think. Debt is not added to your net worth; instead, it’s subtracted from your assets as part of your liabilities. This is why people with high levels of debt can have a negative net worth, even if they have substantial assets.
How debt affects net worth
To understand how debt affects net worth, let’s break down the components of the net worth calculation:
Assets: Assets are anything of value that you own.
This includes:
- Cash and bank accounts
- Investments (stocks, bonds, mutual funds, etc.)
- Real estate
- Vehicles
- Personal property of value (jewelry, art, etc.)
- Retirement accounts
Liabilities: Liabilities are your debts and financial obligations.
This includes:
- Mortgages
- Car loans
- Student loans
- Credit card debt
- Personal loans
- Any other outstanding debts
When calculating your net worth, you subtract your total liabilities from your total assets. This means that debt directly reduces your net worth.
Example net worth calculation
Let’s look at an example to illustrate how debt affects net worth…
Sarah has the following assets and liabilities:
Assets:
- House value: $300,000
- Car value: $15,000
- Savings account: $20,000
- Investments: $50,000
- Total Assets: $385,000
Liabilities
- Mortgage: $200,000
- Car loan: $10,000
- Student loans: $30,000
- Credit card debt: $5,000
- Total Liabilities: $245,000
Sarah’s net worth calculation:
- Net Worth = Total Assets – Total Liabilities
- Net Worth = $385,000 – $245,000 = $140,000
In this example, Sarah has a positive net worth of $140,000, despite having $245,000 in debt.
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Why net worth matters
Understanding your net worth, including how debt affects it, is important for several reasons:
- Financial health indicator: Net worth provides a comprehensive view of your financial situation, balancing what you own against what you owe.
- Goal setting: Tracking your net worth over time can help you set and measure progress toward financial goals.
- Retirement planning: Your net worth is a key factor in determining your readiness for retirement.
- Borrowing capacity: Lenders often consider net worth when evaluating loan applications.
- Estate planning: Net worth is crucial for effective estate planning and wealth transfer.
Strategies to improve net worth
Understanding that debt reduces net worth, here are some strategies to improve your financial position:
- Pay down debt: Reducing your liabilities will directly increase your net worth.
- Increase savings: Building your cash reserves adds to your assets.
- Invest wisely: Growing your investments can significantly boost your assets over time.
- Avoid new debt: Be cautious about taking on new liabilities that could offset asset growth.
- Increase income: Look for ways to boost your income, allowing you to save and invest more.
- Revalue assets regularly: Ensure your asset values are up-to-date for an accurate net worth calculation.
Special considerations
A few potential situations to keep in mind…
- Good debt vs. bad debt: While all debt reduces net worth in the calculation, some debts (like mortgages or student loans) may be associated with assets that appreciate over time or increase earning potential.
- Negative net worth: It’s possible to have a negative net worth, especially early in your career or after major life events. This isn’t necessarily alarming if you have a plan to improve your financial situation over time.
- Net worth over time: A single net worth calculation provides limited insight. Tracking net worth over time gives a clearer picture of your financial progress.
The bottom line
In summary, net worth does include debt as part of the calculation. Specifically, debt is included as liabilities, which are subtracted from your assets to determine your net worth. Understanding this relationship is crucial for managing your overall financial health.
By calculating your net worth and understanding how your debts impact it, you can make more informed financial decisions. Whether you’re planning for retirement, considering a major purchase, or simply trying to improve your financial standing, keeping an eye on your net worth – and working to improve it by managing debt and growing assets – is a key step towards achieving your financial goals.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include: 
- One monthly program payment 
- We negotiate on your behalf 
- Average debt resolution in as little as 48-60 months 
- We only get paid when we settle your debt  
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side? 
About the author
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, NE, NM, NV, NY, NC, OK, PA, PR, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in any other state contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required. 
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment. 
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy. 
