What Happens When A Person’s Liabilities Are Greater Than Their Assets?

When your liabilities, or debts, are greater in value than your assets, or the combination of your savings, investments and real estate, you have what’s called a negative net worth. We calculated net worth here a while ago, but here’s a refresher:

Negative net worth implies financial instability. It indicates a lack of financial cushion and potentially limited resources to cover expenses or emergencies. But hold up! Let’s take a pause here. Negative net worth does imply financial instability, but it doesn’t guarantee it. For example, some folks graduate from college with student loans. More often than not, upon graduation those people’s net worth will be negative. It IS possible to be stable and have a negative net worth. You can, and should save some cash when you’re in debt to prevent going further into it if something comes up. Still, a negative net worth is scary! If this is confusing or convoluted (we at Prosperity think it is!), consider contacting us to schedule a money date and we can look at your unique situation and come up with a plan that’s right for you.

Now, back to negative net worths. With a negative net worth, obtaining credit or loans might become challenging. Lenders may view you as a higher risk due to your existing debt burden. A negative net worth can also significantly impact your ability to achieve future financial goals. Building wealth, saving for retirement, or making significant purchases might become more challenging. But that doesn’t mean it’s the end of the world! It’s a serious situation, but hope exists. With hard work, a good budget and a plan you can get your net worth back into positive territory. To improve your net worth, focus on reducing debts while increasing assets. Budgeting, reducing unnecessary expenses, paying off high-interest debts, and increasing savings and investments can help turn the negative net worth into a positive one over time.