Deficit Net Worth: What it Means, How it Works, Example

By
Adam Hayes
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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated June 14, 2023
Reviewed by
Thomas J. Catalano
Thomas Catalano
Reviewed by Thomas J. Catalano
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Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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What Is Deficit Net Worth?

Deficit net worth is a situation in which a person or a company's liabilities are greater than their assets. Also known as negative net worth, deficit net worth can occur for a variety of reasons, but it typically arises when current or future asset values erode unexpectedly.

Key Takeaways

  • Deficit net worth occurs when the values of liabilities are greater than the value of assets, resulting in net debt.
  • Such negative net worth can occur suddenly if asset values fall, as in the financial crisis of 2007-2008.
  • While deficit net worth is concerning, it does not imply immediate bankruptcy or other dire consequences for a business or an individual if their net worth can recover over a reasonably short period.

How Deficit Net Worth Works

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 are greater than 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 a particular point in time. When calculated periodically, your net worth can be viewed as a financial report card that allows you to evaluate your current financial health, see where you stand today vs. at some point in the past, and help you figure out what you need to do in order to reach your financial goals in the future.

A negative, or deficit, net worth does not necessarily imply a looming bankruptcy. Just as asset values can sometimes take a plunge, they can also make a rapid rise. Stock prices, for example, 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 drops 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 rather than selling them.

However, a deficit net worth can make it difficult or impossible for an individual to borrow money when they need it. For businesses it can also put a severe limit on financing opportunities and stifle future business growth.

Example of Deficit Net Worth

During the financial crisis of 2007-2008, when home values across the U.S. fell sharply, many people found themselves owing more on their mortgages than their homes were worth at that point, a situation sometimes referred to as being underwater. Since a home is often the largest asset a person will own, this led to many households experiencing a deficit net worth, at least temporarily. 

Home prices recovered over the next several years, so for households that were able to ride it out, having a deficit net worth for a while was not a big problem. However, for people who needed to sell their homes, refinance them, or borrow against them, it was a serious issue. It was doubly difficult for those who lost their jobs and/or saw the value of any securities or other financial assets they owned plummet as a result of the crisis. Many homeowners in that situation ended up losing their homes in foreclosures.

How Can You Calculate Your Net Worth?

Calculating your net worth is relatively simple. List all of your assets and their current dollar value and add them up. Then do the same for your liabilities or debts. After that, subtract your liabilities total from your assets total.

There are many free online calculators that you can use for this purpose. For example, the Federal Deposit Insurance Corporation (FDIC) has this Calculate My Net Worth tool on its website.

How Common Is It to Have a Deficit Net Worth?

In 2019, about 10.4% of U.S. households had a negative net worth, for a total of 13 million households, according to the Aspen Institute. Based on its analysis of Federal Reserve Board data, the institute observed that, "Negative net worth is often—but not always—an indicator of financial hardship."

"Households with negative net worth are a mix of those who live with chronic financial hardship and those transitioning towards building positive wealth (usually through a mortgage and homeownership)," its report explained. "However, the rise of student loan debt makes the future of 'transitory' negative net worth less certain, as more households take longer to repay."

Will a Deficit Net Worth Hurt Your Credit Score?

Probably not, at least directly. That's because your credit score is calculated based on the information in your credit reports, and they don't include your investments or other assets. In other words, the credit scoring formula won't know whether your net worth is in positive or negative territory.

However, if you are also having trouble keeping up with your credit payments, that will be reflected in your credit reports and damage your credit score.

How Can You Avoid a Deficit Net Worth?

Because your net worth is based on both your liabilities and your assets, you can guard against a negative net worth by not taking on an unnecessarily high amount of debt and by regularly saving and investing to build up your assets.

Having a diversified portfolio of assets is important, too. While some classes of assets may fall in value at a particular point, others could hold their value or even increase, lessening the hit to your total net worth.

The Bottom Line

Having a deficit net worth can happen when a person's major assets, such as a home, experience a significant drop in value. Businesses can also experience a deficit net worth. While a deficit net worth may not be a problem if the assets rebound in value, can create serious difficulties if it persists for a long time or gets even worse. There are, however, steps you can take to try to prevent that.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Pew Research Center. "Foreclosures in the U.S. in 2008."

  2. Aspen Institute. "Thirteen Million US Households Have Negative Net Worth. Will They Ever Move From Debt to Wealth?"

  3. Experian. "What's Not Included in Your Credit Report?"

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