Help! don't understand this problem.

Question

Last year Liam Brown calculated his net worth.
Consider Liam Brown's current situation as listed below.
This year, Liam saw an increase of $34,800 in his net worth from last year.

What reasons do you think account for the increase in his net worth?

------------------------------------------------
Liam Brown is single, in his mid-twenties, and owns a condo in a big city. He has calculated the following assets and liabilities.

Assets
Current value of condo: $580,000
Current value of car (listed in Kelley Blue Book): $17,000
Balance in checking account: $980
Combined balance in all savings accounts: $22,500
Current balance in retirement account: $24,800
Current value of computer: $2,900
Current value of collector bass guitar: $6,700
Current value of stocks/bonds: $18,300

Liabilities
Remaining balance owed on home mortgage: $380,000
Remaining balance owed on student loans: $51,000
Combined credit card debt: $1,600

Answer 1

Nowhere in here do you mention what his current salary is. Hopefully, most of his salary, after paying his living expenses, went to paying off his debt. 

 

There are two ways of having your net worth go up.....more poitive numbers (assets) and less negative numbers (liabilities)

Let's look at his positive numbers first.

Real estate prices rise and fall.....so maybe his condo was assessed at a higher price that last year...maybe 570000 yo 580000 which could account for some of his increase.]

Car values usually never go up and in fact usually go down..... so maybe its value went from 18000 to 17000. 

He doesn't have much in his checking account so that won't have a great impact but maybe last year when he calculated his net wort, he only had 500 and now he has 980.....so it went up a little.

Depending on what he did with his excess money from his salary, his savings account could have gone up from 20000 to 22500 accounting for some of the money.

Retirement accounts are sometimes at a fixed interest rate and sometimes are invested in stocks, besides the fact that he may have contributed to them over the year....so maybe he added 2000 and got 500 in interest.

Computer and many other normal items go down in value, so he probably lost money on that.

Collectible items, instruments, art, antiques, comic books, baseball cards.... are subject to whatever the market bears.....so his bass guitar could have gone up for some reason.

A good year in your investments in the stock market could explain a lot also. Nowadays, if you can get 6% on the market you're doing well. So he may have gone up from17200 to 18300.

 

Now the negatives.

He hopefully paid his mortgage every month which was probably around 2000 per month which is 24000 per year. That means that last year, he still owed 292000 on his house, while now he only owes 380000. Less subtractions increase your value.

 

Same with the student loans. I he's been paying it off, let's say he paid in 10000 but 4000 in interest was added meaning 6000 came off from his loans. So last year he owed 57000 but this year he only owed 51000.

 

Maybe his credit card debt was up to 10000 and through payments from his current job, he got them down to 1600.

 

So the point is, paying off your debts is very often the bigger contributor to a rise in your net worth. It is, however, a combination of the 2 efforts. If you have no debt, the only way of increasing your net worth is through proper investing......stocks, real estate, collectibles, 401ks.....

 

Hope this helps.