A look at a household’s balance sheet

Most people understand that a household’s net worth is equal to: Assets – Liabilities.  However, many people do not realize that the location of their assets and liabilities within their balance sheet do not make a difference in terms of their overall net wroth.

I was reminded of this lesson recently while reading the book “Borrow Smart Retire Rich”.  Here is a look at a sample household’s balance sheet:

Sample balance sheet
Assets Value Liabilities Value
Checking $ 10,000 Mortgage $ 160,000
Savings $ 15,000 Auto Loans $ 35,000
Investments $ 175,000 Credit Cards $ 5,000
House $ 200,000
Total $ 400,000 Total $ 200,000
Net worth $ 200,000

In the next balance sheet the sample household takes $5,000 from their checking account and places it into their investment account.  Although the location of the assets change, the overall net worth does not change.

Balance sheet-$5,000 moved from checking into investments
Assets Value Liabilities Value
Checking $ 5,000 Mortgage $ 160,000
Savings $ 15,000 Auto Loans $ 35,000
Investments $ 180,000 Credit Cards $ 5,000
House $ 200,000
Total $ 400,000 Total $ 200,000
Net worth $ 200,000

In the next example the same household moves $5,000 from their checking account and pays-off their credit card debt.  Again, the location of the assets change but their overall net worth does not.

Balance sheet- $5,000 moved from checking to pay-off credit cards
Assets Value Liabilities Value
Checking $ 5,000 Mortgage $ 160,000
Savings $ 15,000 Auto Loans $ 35,000
Investments $ 175,000 Credit Cards $
House $ 200,000
Total $ 395,000 Total $ 195,000
Net worth $ 200,000

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