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Before we dive deep into the topic of negative net worth and whether or not it is a bad thing, we have to make sure that we understand a few of the basic terms which are related to the concept of negative net worth and net worth as a whole as this will help to understand better the topic we shall be discussing in great detail in this article.
Let us start off by understanding what do we mean when we talk about net worth?
You might be co-relating the word net worth with the subject of finance, or you might associate net worth as something that has to do with your favorite celebrities or the richest people on the planet or in other worth something that is beyond the realm of the commoners or the normal people.
Let’s keep all the presumptions and prejudices aside and learn what net worth really is. Net worth is nothing, but one of the many financial ratios often used to measure financial status and stability.
In technical terms, net worth is your total liabilities subtracted from your total assets. To break this down even further, an asset is anything of value that you own, and on the other hand, a liability is something that you owe to an individual or an institution.
When you pay off the things that you owe to others using the things that you own and what is left behind after clearing off all your debts is your net worth in simple terms.
Now let’s get to the start of this article, which is negative net worth. Now, if you are not familiar with the word and hearing it for the very first time, it is quite understandable.
If you associate the term with being broke or having an excessive debt and consider it to be something which is really bad to have on your and something that must be done away with or an issue that must be solved.
But in contrary to popular belief having a negative net worth is actually quite common, normal even especially for people of a certain age, and nothing to be really worried about as you are not the only one having to deal with it.
Many people who do not earn their own income and are financially dependent on others, for example, school and college students, usually have a negative net worth.
Let me explain this further with an example, a person studying at the university has a student loan on him/her to pay for the ever so expensive college education.
This person might not be able to pay off this loan as he/she does not have any real assets, and once his person joins the workforce, they entire the workforce with a debt on them which leads them to have a negative net worth.
One of their primary mottoes is to pay off the student loan once they start earning well, and this is actually the case for many Americans, and the whole student loan scenario is also termed a crisis by many.
This is just one of the many situations due to which a particular person has a negative net worth; many people have a negative net worth irrespective of their age, gender, nationality, or class, and no matter where you come from, there is always a way in which you can fix your negative net worth issue.
In this article, we shall provide you with a few useful tips that will help you handle your negative net worth problem a lot better.
Let us discuss negative net worth in further detail. But, first, let us take an example of net worth discussed earlier in this article; according to that, net worth is your total assets minus your total liabilities.
In even simpler words, it is all you owe subtracted from all you own, so if we take this meaning into consideration, negative net worth is when you owe more than your own or, in other words, your liabilities are greater than your assets.
It is because of this you have a negative net worth as you will not be able to pay off all your debts even if you exhaust or sell all your assets to settle your debt as you don’t have enough of them.
I would like to take the example of the college student who has a student loan on him/her again to make it easier for you to understand the topic. Let us assume that the college student has taken a student loan of around $50000, now the student loan is a liability, a debt that he/she has to pay off.
Let us also assume that he/she has total assets of around $6000 and that he/she does a job that pays him/her $1000 a year. Even if we add both the value of the assets as well as the income, the value of liabilities is still greater than the total assets owned by the student.
In this situation, we would say that the student has a negative net worth and unfortunately, this is quite common for many individuals in America as they have to pay off huge student loans as soon as they start working but the clearing of this debt takes a lot longer than one usually imagines.
Let Us Find Out If Having A Negative Net Worth Is Really A Bad Thing?
Let us get a few things cleared before we proceed with any other the distribution of resources, especially financial resources, is highly unequal throughout the whole wide world.
In order to get our work done or to something or to avail of a service that is beyond our financial means, many of us resort to taking a loan from various financial and other institutions.
For example, if you don’t have enough resources to buy a house, you take a home loan, if you want to study for a course or degree that seems like a financial investment you are not ready to make, you don’t necessarily have to give up on your dream entirely you can take a student loan instead that will take care of the financial needs of your course for the time being.
Having a negative net worth is not always a bad thing, and in some cases, it is even inevitable many students start out with a negative net worth because of the student loans they have on them;
It is simply inevitable for them to avoid having a negative net worth in this case and little do they care about it at that point in their lives and even before they apply for these student loans they are thinking of it as an investment in the betterment of their overall career as the loan enables them to opt for their choice of courses which would not have been possible otherwise.
Negative net worth matters and affects different individuals differently, especially depending on their financial stability and status and an individual’s overall financial standing altogether. In other words, negative net worth and its effects are subjective and relative in nature.
If you are determined enough to get yourself out of the situation, you definitely can, and here are some ways in which you deal with negative net worth better.
- Having a financial budget is a non-negotiable not matter if you are a student or a business owner. It helps you to draw the line regarding your finances, manage them better and avoid unnecessary expenses. In addition, the financial budget has proven to help many people with a negative net worth as it helps them keep track of their debts and create better strategies to pay them of and increase their overall assets.
- Pay off all your debts as soon as you can and as long as you have enough assets to settle those debts off. The debt can be as big as a student or a home loan or as small as your credit card bill make sure that you keep your liabilities as low as possible to remain in a stable and sound financial state.
- Cut down all your unnecessary expenses, and the money you save from them can be invested in the right place instead.
We all must strive to increase our overall net worth in the present times as well as in the near future. Still, in that process, if we find ourselves in a situation where we have a negative net worth, we must not be worried as we can get ourselves out of this situation by taking all the necessary steps in the right direction. If you take all your financial decisions wisely, your negative net worth can be easily turned into a positive one only if you are determined to do so.