What Should and Should Not Count in Your Net Worth?

Maya's number is right and tells her nothing

Maya sat down to work out where she stands, which was sensible, and arrived at a total that looked reassuringly large. Into it went the flat she inherited, the shares from her employer that have become a substantial holding, her retirement balance, an insurance policy she has paid into for years, and her savings.

The number is not wrong. It is also useless for every decision she actually faces, because most of what makes it large is money she cannot spend, would not sell, or would receive far less of than the figure suggests. She wants to know whether she can fund a particular plan. Her net worth, as calculated, cannot answer that.

The arithmetic of net worth is trivial — everything you own minus everything you owe. What makes it useful or misleading is entirely a matter of what goes into each side, and that depends on which of two quite different questions you are asking.

Two numbers, not one

The first is total net worth, which is a scorekeeping measure. Everything counts, including the home you live in and the gold nobody intends to sell. It answers "what am I worth on paper", and it is the figure most people calculate.

The second is investable or usable net worth, which is a planning measure. Only the assets that could actually fund a goal, after tax and after settling whatever is owed against them. It answers "what can I actually do", and it is the figure that should drive decisions.

Both are legitimate and they are frequently very different. Maya's two numbers are separated almost entirely by the flat and the retirement balance, and the size of that gap is the most informative thing on her page — more informative than either total on its own.

The assets, and the trap in each

Cash and deposits are straightforward: count the balance. Listed investments — funds, shares, bonds — count at current market value rather than what you paid or what you hope, though see the tax point below, because the statement figure is not what you would receive.

Retirement accounts are real assets and genuinely yours, but usually locked until a date or an event. They belong in total net worth and must stay out of any calculation about money you might need before then. Someone counting a locked retirement balance as part of their emergency resilience has miscounted the thing that matters most.

The home you live in is the most argued-about entry, and the honest answer is that it belongs in the total and not in the usable figure. Selling it means buying or renting somewhere else, so the equity is not available to spend without changing where you live. It is wealth; it is not a resource for funding goals unless you would genuinely downsize. Other property counts at a realistic price — what a buyer would actually pay, not the highest figure a neighbour once mentioned — and it is slow to sell and discounted when sold quickly, which matters if you were counting on it for anything with a date attached.

Gold counts at market value, less making charges if it is jewellery, because you will not recover those. A business you own counts only if it could be sold and you would sell it, at a price you have some basis for; a valuation you invented is worse than leaving it out entirely, because it dominates the total and makes everything else look irrelevant. And an insurance policy counts at its surrender value if you would actually surrender it, or at nothing if you would not — never at the sum assured, which is a payment to your family conditional on your death rather than an asset you hold.

Maya's employer shares are the entry worth pausing on. They count, at market value, and they are also a concentration risk she did not choose. A net worth statement records what you own; it does not tell you that a large part of it depends on one company continuing to do well, which is a separate question and often the more urgent one.

What should not be in there at all

Term insurance cover is protection rather than wealth, and it pays out precisely when you are not there to use it. Future income does not belong either, however reliable your salary is — nor does an expected bonus, nor an inheritance you have been told about but not received. Counting money that has not arrived is how a plan comes to depend on something nobody has committed to.

Depreciating possessions are a similar problem in a smaller way. A car, phones, furniture all have some resale value, but including them adds a falling number you would only realise under distress, and it flatters the total. Money owed to you counts only if you genuinely expect repayment on a known schedule; if you would be surprised to see it, it is not an asset. And money you hold on behalf of a parent or a child is not yours to spend at all.

The liability side, where people are least careful

Assets get counted eagerly and debts get counted loosely, which is the wrong way round.

Include the home loan at its current balance rather than the original amount, along with personal and vehicle loans, credit card balances including anything sitting on an instalment plan — that is a loan whether or not it is called one — loans taken against investments or property, and money genuinely owed to family if it is expected back.

Two more are routinely forgotten and both can be substantial. Tax due but not yet paid is a real liability. So is any guarantee you have given on somebody else's borrowing, which is a contingent liability right up until the moment it becomes an actual one, and that moment is rarely convenient.

The tax that changes the answer

An investment's statement value is not what you would receive if you sold it, because selling a gain triggers tax, and the figure that matters for planning is what lands in your account afterwards.

This is not an argument for computing an after-tax net worth every month, which would be tedious and would shift with every rule revision. It is an argument for knowing that a large unrealised gain carries a claim against it, and for doing the arithmetic before relying on that money for something specific. A goal funded from a position with a big embedded gain needs more of that position than the statement implies — which is exactly the correction Maya needs before she decides what her inheritance can actually pay for.

Keeping it useful

Update it on a schedule rather than on a mood, once or twice a year. Checking often turns a planning tool into a scoreboard, and a scoreboard invites precisely the behaviour that damages returns.

Keep both figures side by side, with the home and the locked retirement money as the visible difference between them, because that gap is usually the most useful thing on the page. Value conservatively and consistently, since the method matters more than the precision — a property valued the same way each year gives you a trend, while one revalued optimistically whenever you feel prosperous gives you nothing at all.

And watch the direction rather than the level. Whether it is rising, and why, is the signal. Comparing your level against somebody else's is not, because their number is built from different inclusions and you cannot see which.

What to take away

Net worth is only as good as its definitions. Keep two figures: the total, which includes your home and your locked retirement savings, and the usable one, which does not.

Leave out future income, term cover and depreciating possessions. Count every debt, including the contingent ones. Remember that unrealised gains carry tax that has not been paid yet. And check it rarely enough that it stays a planning instrument rather than a score.