Shiny cars and new homes… everyone sure seems to have money nowadays. Although it is true that many folks in America do have plentiful amounts of disposable income, if everyone was to actually walk around with their true dollar value shown for others to see, you might be surprised.
Americans love to spend money. And many Americans are finding their household expenses are overtaking their incomes, along with the fact that household debt for many Americans continues to rise. This is in part because – instead of paying off their mortgage or other debt liabilities – many people have taken on more debt and used much of their home equity, or other assets value, to pay for such things.
This is all fine, since you are technically paying cash for everything, right?
Let’s say your home is worth $500,000. Let’s say you owe $250,000 on it – then basically your home is half yours, and it is worth $250,000 to you. Now every time you tap into that $250,000 of equity, you own that much less of your home, and your net worth decreases.
Whenever you use your available equity, whether it’s your house, a vehicle, or any other sort of hard or liquid asset, you are decreasing your net worth. On the other hand, as you pay more of it off, your net worth increases.
If you have a car worth $30,000, and you owe $20,000 on it, is a $10,000 asset. Now if you have $10,000 in, let’s say credit card debt (liability), your net worth is now zero (if no other liabilities or assets are owned, otherwise it could be higher or negative that amount).
Now let’s say you bought that $30,000 vehicle, you put $6,000 down as a 20% down payment, and now you have a liability of about $24,000, depending on the actual worth of the car. The actual value (without the cost of depreciation) would be $6,000. As you pay the balance down, (again, without the cost of depreciation) the value of the asset goes up.*
* this is only used for simplifying the example, vehicles rarely hold their value
– net worth –
the value of the total assets a person or company owns, minus the total liabilities owed
Your net worth is your total value of assets you own, subtracted by the total number of any liabilities you have. There are several different kinds of assets, as well as several different kinds of liabilities. Each asset you have is a value, and each liability is a negative value.
Assets –
Your assets are the property you own, whether it’s your car, house, cash, equipment, stocks, retirement fund, or the value of a company. There is both hard and liquid assets.
- Liquid Assets – are assets that can easily be sold and/or converted into cash. Examples of this would be currency, short term investments and government bonds.
- Hard Assets – are assets that are tangible. They usually take more effort to convert into cash than liquid assets; some examples would be real estate, vehicles or equipment, precious metals or commodities or other sellable items of value.
Liabilities –
Your liabilities are the amount owed of something owned. If something of value has been purchased, it is the difference from what is owned versus what is owed. It is any sort of unpaid debt. Examples of these would be loans, lease obligations, income or sales tax payable, or any other debt or negative value.
You would then add up the total number of assets, and subtract the total number of liabilities from the assets, and there’s your net worth.
ASSETS LIABILITIES NET WORTH
Home $500,000 $250,000 = $250,000
Vehicle $30,000 $ 20,000 = $ 10,000
Savings $10,000 = $ 10,000
Investments $15,000 = $ 15,000
Loans/Credit Cards $ 10,000 = $(10,000)
TOTAL = $555,000 – $ 280,000 = $275,000
As you see, $275,000 is the net worth here. When you add up your total cost of assets $555,000, subtracted by the total cost of liabilities $(280,000), it equals the net worth of $275,000.
Although there are many different kinds of assets and many different kinds of liabilities, this is just a basic example. The more of your property you actually own, versus what you owe on the asset, the value goes up. Likewise, the less you owe in liabilities, the less that is deducted from your total value of assets, hence increasing your net worth.