How is net worth defined?

Net worth is defined as the total value of assets minus liabilities. This means that to calculate an individual's net worth, you would take all of their valuable possessions—like cash, investments, real estate, and personal property—and subtract any debts they owe, such as loans, mortgages, and credit card balances.

This calculation provides a comprehensive snapshot of an individual's financial health and wealth at a specific point in time. A positive net worth indicates that assets exceed liabilities, while a negative net worth implies that liabilities surpass assets, showcasing a more precarious financial situation. Therefore, understanding net worth is crucial for effective personal finance management, as it helps individuals assess their overall financial standing, set goals, and plan for the future.

The other choices do not accurately capture the concept of net worth: total income earned pertains only to a person’s earnings over a period, an annual budget surplus relates to income exceeding expenses within a specific timeframe, and equity in one's home refers specifically to the value of the property minus any mortgage owed, which is just one component of a complete net worth calculation.