Assets and liabilities are directly connected to net worth through a fundamental financial relationship expressed by the formula: Net Worth = Assets – Liabilities

• Assets are everything you own that has monetary value, such as cash, investments, real estate, vehicles, and other valuables

. They represent economic resources or financial fuel that contribute positively to your financial position.

• Liabilities are what you owe-debts and financial obligations like mortgages, loans, credit card balances, unpaid bills, and other debts

. They act like brakes, reducing your overall financial resources.

Net worth is essentially the residual value after subtracting all liabilities from your total assets. It reflects your financial health or equity, indicating how much you truly own free and clear of debts

. For example, if you own a house valued at $250,000 and have a mortgage of $100,000, your net worth from that asset would be $150,000 (house value minus mortgage)

. Similarly, paying down liabilities (like reducing a loan balance) or increasing assets (like growing investments) will increase your net worth

. In summary:

• Increasing assets or decreasing liabilities raises net worth.
• Decreasing assets or increasing liabilities lowers net worth.
• Net worth can be positive, zero, or negative depending on the balance between assets and liabilities

This relationship is foundational for personal finance, business accounting, and understanding financial stability.