Deficit net worth is not a complicated concept, so let’s break it down and understand how we define it. The concept of deficit net worth has been around for many years. The term was used by financial planners and accountants to show whether the person has a negative or positive net worth.
What Is a Deficit Net Worth?
A deficit net worth, also known as a negative worth or negative net worth, is a financial situation in which an individual’s debts exceed the fair market value of his or her assets.
This figure can be calculated by adding up all of an individual’s debt and comparing it to their available assets.
How Deficit Net Worth Works
Deficit net worth can be a personal or business situation. Debt can be the result of poor financial decisions and/or circumstances beyond one’s control.
For individuals, debt can accumulate over time through the purchase of expensive items, such as cars or homes, and through credit card use.
In the case of businesses, deficit net worth may be the result of capital investments in order to expand product offerings or services. Although deficit net worth is not necessarily a cause for alarm, it should be closely monitored. If excess debt continues to accumulate, it may become difficult to pay back creditors.
Example of Deficit Net Worth
For example, if Jane Doe has $10,000 in credit card debt and her car is worth $3,000, then she has a deficit net worth of $7,000. If she had another credit card with $5,000 on it, her deficit net worth would be $12,000.
Importance of Deficit Net Worth
A deficit net worth is an indication that an individual has accumulated a significant amount of debt. While not necessarily a bad thing, a deficit net worth can be troubling for individuals who have not thought about how they will pay off their debt.
Generally, a deficit net worth is the result of one of two things. Either an individual has invested in some form of asset (such as real estate) that they believe will appreciate in value over time, or they have become overwhelmed with debt and simply do not know how to manage it. In either case, having a deficit net worth means that an individual needs to keep track of their finances very carefully so as not to get into even more trouble.
Deficit Net Worth and Bankruptcy
A negative net worth figure does not necessarily mean that an individual is bankrupt or heading toward bankruptcy. Some people may simply be young and starting out in their careers with minimal assets. Others may have significant assets but also significant debt. For example, some individuals may have large mortgages on their homes but also have substantial retirement accounts that they have not yet tapped into.
What it means to have a Deficit Net Worth
A person with a deficit net worth can have financial stability if the bulk of their debt is long-term, such as a mortgage or student loans. This debt allows them to make payments over an extended period of time and invest in assets for the future.
Someone with a deficit net worth may instead have short-term debt, such as credit card debt, which can lead to financial instability as they struggle to make monthly payments even though they don’t have any substantial assets to show for it.