“Hey Dad, what is my net worth?”

Maybe you should find out, kids:

Your net worth is the value of all of your assets minus all of your liabilities.  If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth…“which means you’re broke!”  

The first step is to determine the total amount of all of your assets. Assets are your possessions that have value, that you can sell for cash — for example, money in bank accounts, stocks, bonds, personal property (watches, art, comic books, Jordan sneaker collection, cars), your home or other real estate. Once you've calculated your assets, now determine the total amount of all of your liabilities. Liabilities are debts like credit card balances, Afterpay, personal or auto loans, school loans, and mortgages. Understand that it is very easy to get into a negative net worth situation, especially as a young adult, even one who lives at home, and has a job.

So, you need a car, right?  But you don’t want just any car.  You want a Dodge Challenger SRT Hellcat Jailbreak, “blacked out”, with 20-inch Vossen wheels, tinted windows, and an exhaust system that spits fire. With your new job, you feel that you can afford the $1,400 per month car payment for 72 months (that’s 6 years).  You use all of the money you have saved to put down on this car.  You make the deal, then the Dealer asks for your car insurance information.  Oops.  You quickly search around the internet on your phone and you find out that the cheapest insurance that you can get on this kind of car is $500 per month, because you’re not 25 yet (the magic age designated by insurance companies). That’s now a $1,900 per month car expense alone, not including the ceramic coating and the upgraded sound system you want to install.  You think to yourself, “okay, that makes things a little tight, but I’ll be okay”.

Right now, your car is an asset, because you can sell it for cash if you need to, however your car is a liability too, since you still owe money on it.  And in most cases, what you owe on your car is more than the car is worth.  So, if your Dodge Challenger SRT Hellcat Jailbreak is now worth $80,000, but your outstanding car loan balance is $88,000, you have an $8,000 negative net worth, (as long as you don’t have any other assets and outstanding liabilities).  If you need to get out of this car, at this point, you would have to give the car back to the Dealer and pay the finance company an additional $8,000 to satisfy the loan. Hard to believe, huh? “It happens”. Let’s look at the net worth calculation:

Asset (Hellcat Value $80,000) - Liability (Hellcat Outstanding Loan Amount $88,000) = -$8,000 Net Worth

For those who follow Dave Ramsey, he will tell you that a brand-new car loses somewhere between 9% - 11% of its value the minute you drive off the lot. He then says that car will depreciate by 15% - 25% every year until it hits the 5-year mark.

One day, on your way home from work, you hit something in the road that flattens your right front low-profile tire and cracks that 22-inch Vossen wheel.  With no savings and no emergency fund, you are forced to put the expense on your credit card, along with that next $500 insurance payment.  “Your net worth just potentially got worse”.  If you don’t have the money to pay the credit card statement balance in full by the due date, the interest added to your account balance will make you wish you had bought a used, bright yellow, Chevrolet Spark.

Your expenses start to add up very quickly.  Quicker than the money you are making. Calculating your net worth now lets you know, that you are broke, but hey, you look really good in that blacked out Hellcat, “for now”.  Guess what happens next?  Here’s a hint: Murphy’s Law.

The message is, it is extremely important to have an emergency fund (6 - 12 months of expenses), pay credit card balances in full prior to the due date, and most of all, don’t let your “wants” destroy your credit or your financial future.

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