What is Deficit Net Worth?
Deficit net worth occurs when the value of your assets is less than the value of your debts.
Deficit net worth is what happens when your debts are greater than your assets, meaning that the value of your possessions and investments is less than the amount you owe.
Individuals, families, and businesses use net worth as a means of measuring their financial health. A positive net worth indicates that an individual, family or business has more assets than liabilities; a negative net worth indicates the opposite.
What causes Deficit Net Worth?
People often have a net worth that is negative because they owe more than they own. People who have student loans or car loans can have a net worth that is negative.
These loans create a deficit in the person’s net worth, although they also allow that person to purchase things he or she would not otherwise be able to afford.
The concept of deficit net worth is most common in people who are just beginning their careers. The majority of people in this situation typically have a lot of debt and little wealth to show for it.
As people get older and amass more assets, however, the amount of debt that they carry tends to decrease and their net worth increases.
Bad Spending Habits – The biggest reason for Deficit Net Worth
Another big reason is overspending on housing. Housing costs should be no more than 25%-30% of your income. If you’re spending more than that, you’re likely to have difficulty making ends meet.
Overspending on cars and other vehicles. Vehicles depreciate rapidly, so buying new cars and trading them in every few years is a recipe for financial disaster. Instead, buy used cars and keep them until they’re worn out.
Overspending on entertainment – Eating out, going to the movies and other forms of entertainment can be fun, but they’re expensive. If you don’t watch your spending in these areas, your finances won’t stand a chance.
Student Loans – Student loans are the only form of personal debt that does not require approval based on income. This means that students are often approved for more than they can afford to repay, and some get into so much debt that it takes years to pay off — or even decades.