Assets and debt are terms many of us associate with business balance sheets, but they also apply to household and family finance. Understanding these terms helps couples to set short- and long-term financial goals and clearly identify items in personal budgets. While consumers often go into debt to acquire and accumulate assets, households can run into trouble when debt rapidly increases or assets quickly decline. Increasing assets and decreasing debt improves a family's financial net worth.
For household financial planning purposes, assets have significant value on the open market. Cash, real estate, investments, vehicles, insurance policies with cash values, art and jewelry are considered household assets. Assets increase and decrease in value based on market demand. Many households set a goal to accumulate enough assets during working years to generate income and live comfortably in retirement. Families with assets can liquidate or sell them in times of financial crisis, such as job loss or long-term medical issues.
Debt refers to money owed to lenders. People use debt to make current purchases without cash. They commit to paying the loan back with interest, money charged by the lender for the privilege of borrowing the funds. Some debt allows individuals to make purchases or investments that will potentially increase in value, such as real estate, an education and stock and bond market investments. Debt such as credit card debt or consumer loan debt accumulates if money is borrowed regularly without being paid off. As debt increases, so do the interest costs, required monthly payments and the time required to pay it off. Increased debt may result in unbalanced household budgets and in serious cases delay retirement as families work to pay off spiraling debt.
Assets and debt are key components of a family's financial net worth. Calculate net worth by totaling your assets and your outstanding debts, then subtracting the debts from your assets. The net worth of young couples is usually low and sometimes negative, especially if both spouses have student loans, car loans and a mortgage payment. As assets accumulate and grow and debt declines, your net worth increases. Banks and lending institutions review household net worth when evaluating loan and mortgage applications. Economic conditions also impact net worth as the value of real estate and investments fluctuate.
Get lower interest rates by securing debt against assets such as a home, vehicle or investments. Secured debt including mortgages, car loans and investment lines of credit cost less than unsecured debt because they are less risky to the lender, who can seize the asset and sell it if you don't make your payments.
Review your family net worth at regular intervals, either when you meet with your financial planner or as a couple. If you aren't satisfied with the progress in increasing your net worth, revisit your debt repayment and savings strategies and spending habits. You may have to adjust your monthly budget to get back on track.
- Smart Money: Too Much Debt to Retire
- CNN Money: Household Net Worth Jumps $2.8 trillion
- Columbia University National Center for Children in Poverty: Debt and Assets Among Low-Income Families
- University of Illinois News Bureau: Family Debt Hurts Children's Chances of Success in College, Study Says
- United States Census Bureau: Banking, Finance, & Insurance: Household Financial Assets and Liabilities
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