Timemaps Theme 3 Student Activity

TimeMAPS™

Theme 3.0 – Money Basics

Student Activity

Improving Your Net Worth – Student Activity

Name / Improving Your Net Worth – SA0300A5
Prerequisites / Complete Lesson 3.5 – Living with Inflation
Estimated Time / ½ - 1 hour
Activity Resources / Web link: www.financialplan.about.com/od/personalfinance/ht/networthhowto.htm
Note: this is not a TimeMAPS™ sponsored link, the content is provided solely for reference, and was considered relevant at time of publication. No further guarantees or endorsements are implied.
Objectives / 1. Clarify and reinforce the concept of Net Worth
2. Make students aware that some assets increase Net Worth while others decrease Net Worth
3. Identify types of assets that have a higher probability of increasing Net Worth

Remember, net worth is a convenient way of measuring real personal wealth. If you took everything you own and sold it and then repaid all of your debts, the amount of money you had left would be your personal net worth today.

It is important to realize that some assets can improve your net worth more than other assets. For example, most people borrow the money to purchase their vehicles, but vehicles are wasting assets. A wasting asset decreases in value as you are paying for it. For many people, the actual value of the vehicle is less than the principal and interest still owed on the loan and this actually decreases their net worth.

For example, let’s say you purchase a new car and pay $25,000 for the car. You had to borrow the money to buy the car, thus you owe the amount you borrowed plus the interest over the life of the loan. If the interest is $4,000 and the principal is $25,000, you owe $29,000 on the car, but the car is actually worth $25,000. This example would decrease your Personal Net Worth by $4,000.

Take some time to review the Net Worth Worksheet shown in Table A. You will notice many of the items in the Assets column have corresponding entries in the Liabilities column. For example, a home is an asset, but it has a corresponding entry for Home Mortgage and Home Equity Loans in the Liabilities column. Vehicles, Boats, Planes each have a corresponding entry in the Liabilities column. The primary reason for this is that most people borrow the money to purchase these items and repay the money over time.

You should also notice that Cash and Checking/Savings Accounts are listed under the Assets, but none of these have corresponding entries under Liabilities. Entries in these fields actually increase your net worth, but could they could be offset by other liabilities. The entries for Pension, 401(k), IRA and Roth IRA are your savings in different retirement plans and they have no corresponding entries under Liabilities. The money you have in these categories will definitely increase your personal wealth.

Table A

Net Worth Worksheet

Assets / Liabilities
Cash on Hand (1) / Home Mortgage (24)
Checking Accts (2) / Other Mortgages (25)
Savings Accts (3) / Bank Loans (26)
CDs (4) / Auto Loans (27)
Money Market Accts (5) / Student Loans (28)
Money Owed to Me (6) / Home Equity Loans (29)
Life Insurance (7) / Other Loans (30)
Savings Bonds (8) / Credit Card Bal (31)
Stocks (9) / Taxes Owed (32)
Bonds (10) / Other Debts (33)
Mutual Funds (11) / Total Liabilities (34)
Other Investments (12)
IRA Balance (13)
Roth IRA Balance (14)
401(k) Balance (15)
Pension (16)
Value of Home (17)
Other Real Estate (18)
Vehicles (19)
Boats, Planes, etc (20) / Total Assets (35)
Jewelry (21) / Total Liabilities (36)
Collectibles (22) / Net Worth (37)
Total Assets (23)

Answer the following questions about Net Worth using the Net Worth Worksheet and what you have learned about Net Worth.

1. Which of the items shown in the Assets column of the Net Worth Worksheet have the highest probability of actually increasing your net worth?

2. Explain how the following will affect your personal net worth. The current value of your home is $200,000, but you only owe $120,000 in principal on the mortgage loan and have no outstanding home equity loans.

3. Explain how the following will affect your personal net worth. You bought a new vehicle and borrowed $24,500 to pay for it. You owe $28,420 in principal and interest on the car loan.

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