By elmads

Introduction

Net worth = Assets – Liabilities.

It is a snapshot of our financial situation at this point in time, It also states how we are doing financially and what is our total wealth. The significance of knowing our net worth can help us identify areas where we spend too much of our money. Just because we can afford something does not mean we have to buy it.

No matter what is our background, profession, job, business, IQ level or EQ level. The fact that we are handling money for our day to day living, says already a lot on how important for us to know what is an Asset and what is a Liability.

Assets

It is a resource that has a corresponding value such as a possession or property, that is owned by an individual with the expectation that it will provide a future benefit. To make it easier to understand, assets are physical and digital materials that generate money for us in the long run. While it is true that it can decrease in value in the short term, but generally the price appreciates in the long term. The most common assets to man are cash, marketable securities and properties.  

You might ask how about the other materials that we buy? Are they not assets such as cars, apparels, shoes, bags, appliances and others? Sorry to disappoint you but most of them are expendables, they are the items that immediately loses their value immediately and overtime due to wear and tear. In particular, car instantly loses more than 15-35% of its value within a year. That is just literally your money saying goodbye to you. Nevertheless, some personal stuffs can become an asset. The rarity and the high demand for it makes such item an asset like the top rare designer bags, shoes and watches. Even paintings, vintage cars, classic merchandise and videogames can be assets, as long as it will still have value and demand from other buyers and investors.

The best assets are the ones who has both price appreciation and most of all has the ability to make our invested capital safe. First of all, asset prices goes up because of demand hence price appreciation, but the safety comes from the need and value of an asset even if major crisis occurs. To make it more understandable, I’ll be using the 5 basic asset classes as an example.

1.) Cash – The value of cash comes from the people trusting the government. The governments are the one who owns the printed cash that people are using today. As long as the government is stable and is able to support their country and its economy, then the cash will be safe to be used. There will always be demand to buy and use that cash even if the exchange for it with another currency falls.

2.) Bonds – The value of bonds come from the stability of the government and the company who owes money to their investors. The more able the government and company to pay their debts are, the more investors will be willing to purchase it even if the prices fall.

3.) Stocks – The value of stocks are seen in the company’s profitability and health. There will be high demand for companies who are growing, expanding and improving consistently. Prices fluctuate and even sells off tremendously, but there will always be investors who knows if the company is cheap or not, and they are the ones who are willing to buy it at lower price levels because they know the company’s value.

4.) Real Estate – Lands and properties are basic needs of shelter and safety of the people. This will never go away and never die, that itself is the value of real estate. People will always want to have a home to live in and a shelter to protect themselves and their families from external dangers of the environment. If prices fall, there will always be someone who will take advantage of those under priced lands and houses. Just look in the 2008 housing crisis, a lot of people sold their houses because of fear and problems within the financial system that time, plus the massive foreclosures, but there are a some people who bought at the low price levels and took the opportunity. Fast forward today, you already know, property prices are so high that average millennials find it hard to own one for themselves.

5.) Commodities – These are the most basic goods which has an end use. The value of commodities come from the demand to need them in order to produce refined goods. For example, people will not have cars without raw materials like steel, plastics, aluminium, rubber and others.

And that is where the safety of assets comes in, which are all based on each and one of their value.

Liabilities

It is something a person owes to another individual or a corporation (usually banks). This is what you call “Debt”. Most common debts that a person have are, credit card debt, student loans, car loans and mortgages. This is one of the causes for financial ruin, if not handled properly because just like with investing in which you reap the benefits of compounding interest, debt has it as well. This is the reason why there is a term called debt spiral in which your initial borrowed money has compounded so much that you cannot pay for it anymore. This is the reason why debts are considered bombs when not paid fully or as soon as possible, because the longer we hold it the higher the chance it will blow up in our face.

Below is a basic illustration on how to make a list of your assets and debts. I used Excel spreadsheet to make things easier.  

This is just an example, the categories listed will be different for every person because we have different goals and current achievements. Some people have their own house while others rent, others have businesses and business loans while others are employees, you get the point. The essential part here is that you need to be meticulous in finding and writing down all of your assets and liabilities, then subtract assets to liabilities which gives your net worth and financial health.

NOTE: Some individuals exclude their home in their net worth (assets and liabilities) mainly because their mortgage liability eats all of their assets resulting to a negative equity. To know more about you can check the following blogs I'll link down below

• Home Price Appreciation can be Lucrative, depending on this one factor
• Is the home you live in an Investment?

Furthermore, by seeing your personal financial health you will then be able to pin point immediately where are you spending the largest amount of your money, which is mostly in the liabilities side. Nevertheless, if you do not have any debt then it is most likely that your money just goes to your basic expenses and your non-essential expenses. This will give you a higher chance to have a positive net worth as you have less to no liabilities to pay. This is the reason why I hate debt because it causes financial disaster to people who do not know to manage it. Study shows that 61% of Americans have credit card debts and 50% of these people does not pay it on time, which causes for them to pay an interest on top of their initial debt monthly. Take note, this is only in America, what more if this study is conducted in a worldwide scale.

To Sum It Up

In writing down our assets we need to be honest to ourselves, because most of our belongings are not assets. Always keep in mind that assets will either generate us money yearly and/or will increase in price overtime. Same as doing our self made and projected incomes statement, we need to be mindful and aware of the things we have in our financial lives in order to arrive into an accurate net worth and financial health. Liabilities are easy to find but hard to clear off, that is why the goal into a positive net worth journey is to, as much as possible pay off immediately all of our debts.

Positive net worth indicates that we could financially survive even if problems occur, while a negative net worth tells us that we need to work hard and smart to make our and family’s lives safer and with less stress about money. I’ll end my blog with a quote from T. Harv Eker, an author and speaker about wealth and motivation.

“Focus on all four of your net worth factors; increasing your income, increasing your savings, increasing your investment returns, and decreasing your cost of living by simplifying your lifestyle. “

-T. Harv Eker

Knowledge is my Sword and Patience is my Shield,

Evan Louise Madriñan / elmads

Financial Mutant Level of Managing Money – Your own Cash Flow —>

<—Financial Mutant Level of Managing Money – Your own Income Statement

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.