Welcome to spring. May you enjoy the beauty that come with the change in seasons.
This spring we are embarking on a series of financial literacy education. This will be weekly articles on some of the key concepts, explained in detail to help you upskills your money and investment skills. The goal is to help you become better at managing your money.
How much are you worth marks the first article in these series. I stumbled upon this concept most recently in a book I borrowed from a friend titled “Why the rich are getting richer”. Whilst it’s not the most interesting book I’ve read, it has provoked some self assessment and one of that was to evaluate my net worth.
To be able to understand this concept, you are expected to have a basic understanding of the following terms ( simplified definitions):
- Assets- something that makes you money ( e.g a rental income house)
- Liabilities- something that cost you money (e.g personal loan)
- Income- money coming in- Normally linked to assets (e,g monthly salary)
- Expenses- Money going out of your pocket – can be spend on assets or liabilities (grocery costs)
How much you are wealth is the sum of your assets minus your liabilities. This is called your personal balance sheet. For any finance institution to lend you money, they will normally ask you information that will help them assess your net worth. The higher your net worth, the more funding you are likely to obtain.
Some of your common items on a personal balance sheet will include:
- Amount of cash in the bank
- Investment held (e.g shares)
- Fixed property
- Retirement savings
- Life/debt cover
- Motor Vehicle
- Bond on your house
- Personal loan
- Credit card/ store card debt
- Car loan
- Cash loan
To compute your net work, take the sum of your assets minus your liability. If your assets are more than liability, you are rich, i,e you own more than what you owe other people. If your liabilities are more, you are worth less than you might think.
So to answer the most important question: is your house a liability or an asset? If the value of your house ( how much you can sell it for) exceed how much you owe the bank, then your house is an asset. Otherwise, it is a liability until you pay it off.
How much are you worth? There are multiple templates online that you can use to do this exercise. Google it.
Please comment with any topic that you would like to learn on this spring.
Be right back