Which of the following would cause an immediate decrease in your net worth?

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To assess which action immediately lowers your net worth, we need to recall that net worth = assets minus liabilities at a given moment. Any transaction that increases liabilities without a matching asset increase will reduce net worth right away.
Option 1: Buying a $30,000 car with a $30,000 loan. This creates an asset (the car) worth 30k and an equal liability (the loan) of 30k. Net worth remains the same immediately because assets and liabilities increase by the same amount. It’s a swap of one asset for another liability, not a net change.
Option 2: Paying off $1,000 of credit card debt from your checking account. Here you reduce a liability (credit card debt) by 1k and reduce an asset (checking account) by 1k. Since both sides change by the same amount, net worth does not change right away. You’re transferring value out of one asset to reduce a liability, keeping the difference constant.
Option 3: Purchasing a $2,000 vacation on a credit card. This action increases liabilities by 2k (credit card balance) while assets remain unchanged in the moment (no immediate cash asset added). The immediate effect is a lower net worth by 2k because you’ve increased what you owe without adding immediate value. This option directly reduces net worth now.
Option 4: Transferring $500 from checking to savings. This is simply a reallocation between two assets; total assets stay the same and there is no change in liabilities. Net worth stays unchanged since the overall asset base is the same.

25400 Financial Literacy - Spring 2025 In-class Quiz 1

Which of the following would cause an immediate decrease in your net worth?

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