In financial language, an asset is anything you own that has a cash value. Examples include your house, car, retirement plan, etc.
On the other hand, a liability is any debt you have or anything that is draining your money. For instance: credit card debt, a mortgage, student loans, etc.
Let's say you're a guy and that you borrow $5,000 to buy a diamond for your girlfriend. She now has a $5,000 asset and you have a $5,000 liability.
Do you know where you stand financially? In order to really know, it's a good idea to calculate your net worth. Your net worth is figured by subtracting your liabilities from your assets. It's easy with the help of our calculators!
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By making a list of liabilities and assets, you may be surprised by how much you own (or owe!). Your net worth can help you think about plans for the future.
Now imagine you're a young professional woman. You figure your net worth and realize your money is socked away in a low-interest savings account, but your credit card debt is high. This realization helps you decide to reduce your debt and pay cash for the new laptop computer you were planning to purchase.
Let's take a look at two imaginary families and what a closer look at their net worth reveals. As you prepare to take on the role of financial consultant to these two families, keep in mind the old saying, "you can't judge a book by its cover!" |
Sometimes people can be living in expensive houses and driving va-vroom cars and yet have little or no net worth. Some of these people actually have negative net worth, which means they owe more than they own. They have a lot of company: our government estimates that about 10 million Americans have negative net worth. Here's a look at our first family:
DR. ROMEO AND MRS. JULIET SPENDITALL
Dr. Spenditall is an E.R. doctor and his wife is a nurse. Together they make over $150,000 per year.
Assets:
House in Snob Suburb $ 450,000
Vacation house at the beach 60,000
Bells and Whistles Car 65,000
SUV for Juliet and kids 35,000
Furniture, appliances in house 10,000
Juliet’s jewelry 3,000
Wine in cellar 2,000
Savings (0)
Investments (0)
Total Assets $ 625,000
Liabilities:
Mortgage on House $ 380,000
Mortgage on beach house 54,000
Home Equity Loan 40,000
Loan on Romeo’s car 52,000
Loan on Juliet’s SUV 28,000 |