What Is Deficit Net Worth?
Deficit net worth is a situation in which net liabilities are higher than net assets. Also known as negative net worth, this can occur for a variety of reasons, but typically it arises when current or future asset values erode unexpectedly.
- Deficit net worth occurs when the values of liabilities is greater than the value of assets, leading to a net debt.
- Such negative net worth can occur suddenly if future projections change in such a way that impairs present value calculations for assets.
- While deficit net worth is concerning, it is not immediately imply bankruptcy for a firm or individual if net worth can recover over the short-term.
Deficit Net Worth Explained
Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.
Your net worth provides a snapshot of your financial situation at this point in time. If you calculate your net worth today, you will see the end result of everything you've earned and everything you've spent up until right now. When calculated periodically, your net worth can be viewed as a financial report card that allows you to evaluate your current financial health and can help you figure out what you need to do in order to reach your financial goals.
A negative, or deficit, net worth does not necessarily imply bankruptcy. Just as quickly as asset values can plunge, they can also rise. As the global financial crisis of 2008 began to recede, housing prices recovered. Many people who were able to hold onto their homes saw the values rise in subsequent years. Similarly, stock prices can be extremely volatile. A person who has a majority of their net worth tied up in their stock portfolio may experience a temporary deficit net worth if the market corrects and the portfolio loses a large portion of its value. This may only be a temporary situation if the market recovers its value and the individual maintains their holdings through the downturn.
However, a deficit net worth can at times negatively influence future financing opportunities and stifle future business growth. If you'd like a tool to determine if you're experiencing a negative net worth you can use a Net Worth Tracker which allows you to calculate, analyze, and record your net worth for free.
Example of Deficit Net Worth
For example, during the global financial crisis in 2008 when home values fell sharply, many people were left owing more on their mortgage than the home was presently worth (they were underwater on the mortgages). Since a home is often the largest asset a person will own, this led to many households experiencing a deficit net worth. Likewise, back in frontier days, land and property often gained or lost value suddenly depending on where the nearest railroad was located.