Net worth, also known as personal capital, is like your personal balance sheet. It’s all the assets you own less the debts you owe—acting as a snapshot of your personal wealth. However, your income isn’t included in your net worth.

Having positive net worth means owning more assets than debt you owe. It is possible to have a negative net worth, where you owe more money than assets owned. For example, this can happen when someone takes out a large amount of student loans, but has yet to acquire any meaningful assets. The goal is to have an upward rising personal capital over time. 

Net worth calculated at a specific point in time. It shows your current personal capital, which is all your assets (things you own) less liabilities (debt you owe). Ideally, your personal capital grows as you age. There are two ways to increase your personal capital—increase your assets or reduce your debts. Ways assets can increase is with investment growth, such as rising value of real estate or an equity stake within a business. 

Think of personal capital as your personal balance sheet. Your income, such as salary, dividends, and investment income, are all part of your personal income statement. Cash within your checking account, which might be from your salary, is part of personal capital, however. 

These are the things you own, which can include cash held in bank or investment accounts, your car, and your home. “Cash” can include checking, savings and money market accounts, savings bonds, certificates of deposit (CDs), or the cash value of your life insurance policy. Investment accounts will include assets, such as stocks or bonds, held in brokerage accounts, as well as retirement accounts—401ks, individual retirement accounts (IRAs) and pensions. 

Ownership interests in businesses are also included, which generally means a stake in a private company. The value of business ownership should be recorded at market value, which is the value you’d receive if you sold the business today. Personal property, which are assets you use or collect, can also be included in personal capital. This includes assets you use, such as your home, vacation home, automobiles, boats, and jewelry, among other things. Assets you collect may include antiques, coins, or artwork.

To include personal property, the resale value must be able to be reasonably estimated. Investment real estate properties would also be included, although they might be viewed as a business interest/ownership if you own your property in a limited liability company (LLC) or other company structure. 

These are your debts and the money you owe, which can include immediate debts and all forms of loans—student loans, mortgages, auto loans, and personal loans. Also included in liabilities are credit cards and revolving credit lines, such as home equity lines of credit (HELOCs). Immediate debts would include income tax owed or outstanding bills. Debt or mortgages on investment properties should also be included. 

Anything you’re expected to pay should be included in liabilities, which means medical debt, loans against your 401k or IRA, life insurance policy loans, etc. should all be considered as liabilities. 

Personal capital and personal income can be very different and appear to tell two very different stories. For example, Charlie, making $35,000 a year, has $1 million in investments and owns a home worth $500,000. His debt includes $5,000 in credit card debt and a mortgage with $95,000 remaining. Charlie’s net worth—assets less liabilities—is $1.4 million (or $1 million + $500,000 – $5,000 – $95,000). 

Meanwhile, Roger, making $150,000 per year, has saved $100,000 for retirement, has a home valued at $1 million and owns various rental properties valued at $2.5 million. Yet, he owes $900,000 on via the mortgage on his primary home and $2.2 million in debt on the rental properties, as well as $200,000 in credit card debt. Roger’s net worth comes out to $300,000 (or $100,000 + $1 million + $ 2.5 million – $900,000 – $2.2 million – $200,000), which is noticeably less than Charlie, despite the income differential. 

While income can tell one story, net worth can tell another, which is why banks and lending institutions generally ask for a detailed accounting of your assets and liabilities when considering a mortgage. 

There are guidelines for what your personal capital “should” amount to based on your age. Now, the interesting thing is that while your income doesn’t factor into your personal capital, it is used when figuring out where you should be in terms of the amount you have. 

The loose rule of thumb is to have half your net income as personal capital by the time you hit 30 years old. There’s some leeway there given time lost to college, but by the time you hit 40, the amount goes to twice your income, and then four times your income by 50. Finally, by the 60 mark, the goal should be to have six times your income. Here’s a quick breakdown of what a target personal capital amount might look like: 

 

Real estate can play a pivotal role in building net worth. For many people, their home is their primary source of personal capital. While the merits of renting versus owning can be reserved for another time, having a mortgage is a form of forced savings. With every mortgage payment you own a little more of your home, which is, usually over the long-term, an appreciating asset. 

Say a homebuyer, call him 25 year old Samuel, takes out a mortgage for $250,000 to purchase a home. The mortgage will be his largest debt ever, but after paying for mortgage for 30 years, he’ll own a home outright that’s worth much more (hopefully) than the purchase price. This will likely be his largest asset when he’s 55 years old and make up a large part of his personal capital.