How does one calculate net worth?

Calculating net worth involves determining the difference between what a person owns and what they owe. This is achieved by subtracting total liabilities from total assets.

Total assets encompass everything of value that the individual possesses, such as cash, real estate, investments, and personal property. On the other hand, total liabilities include all debts and financial obligations, such as loans, mortgages, and credit card debts.

The formula is straightforward: net worth = total assets - total liabilities. This calculation gives a clear picture of an individual's financial health, indicating whether they have a positive or negative net worth based on their assets relative to their liabilities.

Other methods mentioned in the options do not provide a comprehensive or accurate measure of net worth. For instance, simply adding total assets and total liabilities would yield a sum that does not accurately reflect financial standing since it ignores the critical factor of debt. Combining all financial investments is too narrow and does not account for other assets or liabilities. Multiplying income by the number of years until retirement does not assess net worth at all; instead, it estimates potential retirement savings, which is unrelated to the current net worth calculation.