Series: General Concepts

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What You Owe & Own Adds Up Terms of Use:

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! See related links below.

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

Series: General Concepts

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What You Owe & Own Adds Up Terms of Use:

Visa and Mastercard debts 24,000

Medical School loans 120,000

Department store credit cards 4,000

Money owed Grandpa Spenditall 45,000

Total Liabilities $ 747,000

Net Worth: ($ 122,000)

(Assets of $625,000 minus Liabilities of $747,000 equals Negative Net Worth of -$122,000)

This family is broke despite their high income, big house and fancy cars. But all is not lost. By figuring their net worth, the Spenditalls decide to make some positive changes.

After our "consultation", the Spenditalls sold Juliet’s jewelry and the beach house for $63,000. They paid off the beach house mortgage ($54,000) and used the $9,000 left to pay down some of their credit card debt. They plan to pay off their debts more quickly with the extra money they'll save each month by not having to pay the beach house mortgage.

Now here's a look at our second family:

GEORGE AND MARTHA PENNYPACKER

George is a mechanic and Martha is a waitress. Together they make $48,000 per year. Some of this money also comes from people who rent apartments from them.

Assets:

House in Trailer Park $ 25,000

Apartment building 120,000

Furniture and clothes 1,500

Pick-up truck 3,000

Savings Accounts 25,000

Stock in George’s company 45,000

U.S. Savings bonds 8,000

Martha’s Beanie Baby collection 3,000

Total Assets $ 230,500

Liabilities:

Mortgage on apartments $ 80,000

Credit card debt (0)

Car or trailer loans (0)

Total Liabilities $ 80,000

Net Worth: $ 150,500

(Net worth equals $230,500 minus $80,000 or $150,500)

This is pretty good, especially because the Pennypackers are putting away money every month. After calculating their net worth, George and Martha decide to move money out of savings and put it in a mutual fund investment where it will earn more money for them.

Now go figure your Net Worth and see what it reveals. It's the first stop in reaching your financial goals. For more help, see the related links below.

See what you learned.

Check out "Budgeting: A Plan for All Seasons"