Financial Freedom: Know Your Assets, Liabilities and Net Worth
Know Where Your Money is Going
Knowing where your money is going is the first step to financial freedom. To know where your money is going, you need two tools. One is a budget, which will be discussed in another article. The other is your net worth. Why is your net worth important?
“Knowing your net worth is important…if only for one reason: It forces you to interact with your financial life, keeping you in touch with your money and knowledgeable about where you are on the road to where you think you’re going.” explains Jeff D. Opdyke, a financial reporter for the Wall Street Journal, in The Wall Street Journal Complete Personal Finance Guidebook.
Your net worth is a single number representing your financial health. It is a picture of your finances, the total of everything you have earned or spent, until today.
Find Your Net Worth
To figure your net worth, begin by listing together all of your liquid assets. A liquid asset is defined as anything that can quickly be exchanged for cash. This list includes your checking, savings and money market accounts, the cash in your wallet, the change on your night stand and the value of life insurance policies.
Next, make a list of your personal property assets, using their estimated value. Personal property is just what it sounds like: anything you own, that can be sold. On this list, mark the fair market value of your home, the blue book value of your car, stereo, electronics, jewelry, antiques, furniture and books. To see the fair market value of an item is, check the ‘buy now’ price of it is on eBay (if you think the price is too low, check several sellers). While you may be able to get more for it elsewhere, this gives you a good idea of what you could get for it in a hurry.
Now, add up the value of your investments and intangible assets. Investment assets are the stocks, bonds, CDs, mutual funds, retirement accounts, and your share of a partnership. Intangible assets are patents, copyrights, franchises, trademarks, trade names, etc. These can be very hard to put a value on. Websites are another asset where finding their value can be tricky.
When added together, threes three groups make up your total in assets.
Now for the negative part of the equation, calculate your liabilities. Make a list of every debt you owe, both secured and unsecured. This will include credit card balances, auto loans, mortgages, student loans and money barrowed form individuals.
Are you ready for that final number? Subtract your liabilities from your assets.
Do you like the picture in front of you? Are you on the path you thought you were on? Do you see assets sitting idly by, that you could put to work for you? What can you do, in the upcoming months, to delete some of the liabilities and increase your overall net worth?
A Rich Man's View
There is another way at looking at assets and liabilities. It is the way the wealthy count their finances.
If you are looking at your net worth, thinking, “These numbers look good, but I’m broke.” These definitions will tell you why.
According to Robert T. Kiyosaki, author of ‘Rich Dad, Poor Dad,’ the wealthy define assets as anything that puts money in your pocket, while a liability is defined as anything that costs you money.
Look over your assets. By these definitions, how many of them would be moved to the liability side of the chart? Does your home make you money, right now, today? How about your car? The normal view is that one’s home is their greatest asset, but is that really true?
Look over your liabilities. Are they all costing you? I have known more than one person who chose to have a mortgage, even though they could have bought their home outright, because they were making more in the stock market than the interest was costing them.
Using these definitions, what changes do you want to make in your finances?
When I look at my finances in this manner, my on-line articles are some of the few assets I have. Unfortunately, when I compare what I make to the cost of owning a computer and having Internet, I have to wonder if it is not a liability. My first goal is to change this, so that I know my writing is an asset to me and my family.
Emotional Assets and Liabilities
While I have never seen these on a listed on a financial worksheet, I find they are equally important for making wise choices in life. I would define emotional assets as any relationship, regardless of what it is with, that makes you feel good or inspires you. Emotional liabilities would be any relationships that weigh you down or hold you back.
How does your emotional worksheet look? What changes are you going to make?
Right now I have a few liabilities that I do not know how to get rid of, and lots of assets. Overall, the balance is good, but I don’t like debt.
I am contemplating Abraham Lincoln’s famous quote:
“Am I not destroying my enemies when I make friends of them?” as a possible solution.
It's Only Money
Your net worth is important to your financial health in the same way that your BMI (Body Mass Index) is important to your physical health. Likewise, it is no indicator of self worth.
Knowing what you net worth is, plus the assets and liabilities behind it are the starting points to getting where you want to go. Dream big, and reach for the stars!
All Text and Photos (c) Copyright 2010
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