What is the meaning of the net worth of a person?
"An individual's net worth is the value of the person's assets minus his debt. To find your net worth, add up the value of everything that you own: your house, your cars, your bank accounts, your retirement investments, etc.  Then subtract all of your debt: mortgage, student loans, credit card debt, car loans, etc.  If you sold everything you own and paid off all your debts, you would be left with your net worth. If Bill Gates' net worth is $86 Billion, he likely does not have that much cash sitting in the bank.  Much of his net worth is in the form of assets: stocks, real estate, and other investments.  If he sold everything that he has and paid any debts, he would theoretically have the $86 Billion.  I say ""theoretically"" because in the amounts of stock that he owns, he could cause a price drop by selling it all at once."
"They are limiting your total investment in Notes to no more than 10% of your net worth. Step 1: determine your net worth Step 2: Divide this number by 10 The answer is the maximum amount you can put at risk through Lendingclub. The issue is that if you lose all the investment you will not be bankrupted. If it was the other way you could invest all your net worth in Lendingclub by splitting it among 10+ notes. Your net worth is  ""determined exclusive of the value of your home, home furnishings and   automobile."" Which means don't include the house and the stuff in the house. That means your net worth is the money in the bank; plus the money invested in stocks, ETFs, and mutual funds; plus retirement accounts (401K, IRA); minus loans (student, credit cards)." "Rich people use ""depositor"" banks the same way the rest of us use banks; to keep a relatively small store of wealth for monthly expenses and a savings account for a rainy day. The bulk of a wealthy person's money is in investments. Money sitting in a bank account is not making you more money, and in fact as Kaushik correctly points out, would be losing value to inflation. Now, all investments have risk; that's why interest exists. If, in some alternate universe, charging interest were illegal across the board, nobody would loan money, because there's nothing to be gained and a lot to lose. You have to make it worth my while for me to want to loan you my money, because sure as shootin' you're going to use my loan to make yourself wealthier. A wealthy person will choose a set of investments that represent an overall level of risk that he is comfortable with, much like you or I would do the same with our retirement funds. Early in life, we're willing to take a lot of risk, because there's a lot of money to be made and time to recover from any losses. Closer to retirement, we're much more risk-averse, because if the market takes a sudden downturn, we lose a significant portion of our nest egg with little hope of regaining it before we have to start cashing out. The very wealthy have similar variances in risk, with the significant difference that they are typically already drawing a living from their investments. As such, they already have some risk aversion, but at the same time they need good returns, and so they must pay more attention to this balancing act between risk and return. Managing their investments in effect becomes their new job, once they don't have to work for anyone else anymore. The money does the ""real work"", and they make the executive decisions about where best to put it. The tools they use to make these decisions are the same ones we have; they watch market trends to identify stages of the economic cycle that predicate large movements of money to or from ""safe havens"" like gold and T-debt, they diversify their investments to shield the bulk of their wealth from a sudden localized loss, they hire investment managers to have a second pair of eyes and additional expertise in navigating the market (you or I can do much the same thing by buying shares in managed investment funds, or simply consulting a broker; the difference is that the wealthy get a more personal touch). So what's the difference between the very wealthy and the rest of us? Well first is simple scale. When a person with a net worth in the hundreds of millions makes a phone call or personal visit to the financial institutions handling their money, there's a lot of money on the line in making sure that person is well looked-after. If we get screwed over at the teller window and decide to close our acocunts, the teller can often give us our entire account balance in cash without batting an eyelid. Our multimillionaire is at the lower end of being singlehandedly able to alter his banks' profit/loss statements by his decisions, and so his bank will fight to keep his business. Second is the level of control. The very wealthy, the upper 1%, have more or less direct ownership and control over many of the major means of production in this country; the factories, mines, timber farms, software houses, power plants, recording studios, etc that generate things of value, and therefore new wealth. While the average Joe can buy shares in these things through the open market, their investment is typically a drop in the bucket, and their voice in company decisions equally small. Our decision, therefore, is largely to invest or not to invest. The upper 1%, on the other hand, have controlling interests in their investments, often majority holdings that allow them far more control over the businesses they invest in, who's running them and what they do." "The fundamental flaw here is conflating net worth with utility, at least failing to recognize that there's a nonlinear relationship between the two.  In the extreme example imagine taking a bet that will either make you twice as rich or completely broke. Your expected return is zero, but it would be pretty dumb to take it since being flat broke could ruin your life while being twice as rich may only improve it marginally. In more realistic cases most of your income is tied up in fixed costs, which magnifies relatively small perturbations to your net worth. Losing something essential (like your house or car), even if it's only 20% of your net worth, renders you effectively broke until you scrape together enough cash to get another one. That situation robs you of much more utility than you'd gain from a 20% increase in net worth. In either case, avoiding the risk is completely rational as long as you believe in nonlinear utility as a function of net worth, it's not just an issue of humans being ""risk averse""." "It should be pretty obvious that without knowing what sort of assets the company owns, and what sort of net earnings are being generated it's impossible to say what a $20k equity investment should get you in terms of ownership percentage.   With that said, you want to look at a few to several years of books, look for trends.  Some things to understand that might be subtle red flags: It's extremely common for early stage investors to essentially make loans rather than strictly buying shares.  In the worst case scenario creditors get to participate in liquidation proceedings before shareholders do.  You may be better off investing in this business via a loan that's convertible to equity at your discretion.   Single owner service companies are difficult because all of the net earnings go to the proprietor and that person maintains all of the relationships.  So taking something like 5 years of net earnings as the value of the company doesn't make much sense because you (or someone else) couldn't just step in and replace the owner.  Granted, you aren't contemplating taking over the business, but it negates using an X years of net earnings valuation method.  When you read about valuation there is a sort of overriding assumption that no single person could topple the operation which couldn't be farther from the truth in single employee service companies.  Additionally, understand that your investment in a single owner company hinges completely on one person's ability and willingness to work. It's really vital to understand the purpose of the funds.  Someone will be hired?  $20,000 couldn't be even six months of wages... Put things in to perspective with a pad, pen and calculator.  Don't invest in the pipe dream of a friend of yours, and DEFINITELY don't hand this person the downpayment for their new house.  The first rule of investing is ""don't lose money,"" this isn't emotional, this is a dollars and cents pragmatic process. Why does the business need this money?  How will you be paid back?   Personally, I think it would be more gratifying to put $20k in a blender and watch it blend, this is probably a horrible investment.  The risk should just be left to credit card companies." Imagine a poorly run store in the middle of downtown Manhattan. It has been in the family for a 100 years but the current generation is incompetent regarding running a business. The store is worthless because it is losing money, but the land it is sitting on is worth millions.  So yes an asset of the company can be worth more than the entire company.  What one would pay for the rights to the land, vs the entire company are not equal. "I'll concede that you're probably speaking in good faith- I genuinely believe that you're original statement was one that meant to point out that the ruling class seek to squeeze all the value they can out of being the ruling class, which includes maximizing the size of the rest of the population to drive down wages and get the most labor out of payrolls as possible to maximize profit. I can concede that completely and never suspected that you felt otherwise.  That said, ""reasonable"" people are often unequipped to deal with extreme or academic scenarios using reason alone. My entire point of digression came from the use of the term ""commodity,"" as it refers to things of value who's value arises from their ability to be traded at a profit. Your statement regarding people fitting this definition was true in the time of feudalism- pushing that definition back to the idea that the labor of people was tradable (but people owned themselves) was a major improvement in human rights (happening for different people at different points in history). I drew a point of contention because it's an *important* and *historical* point of contention that should never slip backwards ever, without being pointed out." "&gt;"" I think we can all agree people are not a commodity that is valued in dollars.""  I don't agree with that statment. Ever read an economics textbook? There are three [factors of production](https://en.wikipedia.org/wiki/Factors_of_production) Land, Labor, and Capital. Labor (ie. people) are a commodity that are valued in dollars. The United States governement [values a human life](https://en.wikipedia.org/wiki/Value_of_life#United_States) at around +/- $10 million dollars. The claims that high minimum wages force people out  of the labor force is supported by many famous economists. Milton Friedman (a noble prize winning economist) stated in regards to the [minimum wage](https://www.youtube.com/watch?v=ca8Z__o52sk) that ""People whose skills are not sufficient to justify that kind of a wage will be unemployed.""" "Think of yourself as a business with two accounts, ""cash"" and ""net worth"". Your goal is to make money. ""Cash"" is what you need to meet your obligations. You need to pay your rent/mortgage, utilities, buy food, pay for transportation, service debt, etc. If you make $100 a month, and your obligations are $90, you're clearing $10. ""Net worth"" are assets that you own, including cash, retirement savings, investments, or even tangible goods like real property or items you collect with value. The ""pay off debt"" versus ""save money"" debate, in my opinion, is driven by two things, in this order: If you start saving too soon, you'll have a hard time getting by when your car suddenly needs a $500 repair or you need a new furnace. You need to improve your cash flow so that you actually have discretionary income. Pay off those credit cards, then start directing those old payments into savings and investments."