What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Debt vs. Net Worth

Original post by Michael Wolfe of Demand Media

When calculating a person's personal finances, there are a number of ways of describing a his overall financial situation. One of the most basic ways is to describe the person's debt. This refers to the amount of outstanding debt obligations that the person currently carries. However, this is only half the picture. The term "net worth" refers to the total value of a person's assets minus his liabilities.

Contents

Debt

A person can be expected to take on many kinds of debt in his life. If the person has a credit card, then he may take on debts from making purchases with the card. Similarly, if the person takes out a loan to buy a house or a car, then he will likely take on thousands of dollars of debt. The very act of taking on debt can be healthy and does not necessarily portend a financial problem.

Net Worth

Net worth is the measurement of a person's total assets minus all of her liabilities. For example, if a person has $10,000 in her savings account, $10,000 worth of other assets, and has debts of $5,000, then the person would have a total net worth of $15,000. Net worth can often be difficult to calculate, as the value of a person's assets may fluctuate.

Key Differences

A person's debt is a component of his net worth. While debt and net worth are sometimes incorrectly considered opposites, a better description would be that a person's net worth can only be determined by factoring in the amount of his debt. When describing a person's financial situation, net worth is often a more accurate measure, because the amount of debt that a person carries is relative to his other assets.

Considerations

A person can have significant debt, but still have a positive net worth. This is because the value of a person's assets may outweigh the amount of debt that he currently has on the books. Similarly, if a person's future earning power is taken into account -- both near-term and long-term power -- then a person with debt that outweighs his assets may still be considered financially solvent, even if his net worth is technically negative.


                   

References

  • "Personal Finance for Dummies"; Eric Tyson; 2009

About the Author

Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.


Advertisement