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- Understanding Finance
Cutting Costs: Assets and Liabilities
Knowing your assets and liabilities is very important. They are the keys to knowing your net worth, which is a picture of where you stand financially. One’s net worth is calculated by subtracting all liabilities from all assets. The net worth gives you a clear picture of how much money you have or how much you owe.
An asset is defined as all the cash you have available and anything you own that can be sold for cash. This list includes real estate, automobiles, stocks, bonds, jewelry, antiques, collectables, and anything else you can sell.
Liabilities are defined as debts you owe. Credit cards, the mortgage, auto loans, and the like, are liabilities.
Your Assets and Liabilities
By calculating your net worth, you will find out where you stand financially. You will be able to see where you can make changes. You may find that you have many unused assets, which could be put to work to help you attain your financial goals.
Calculating your net worth is easy. Begin by listing and adding together all of your liquid assets. Liquid assets are assets that can be turned into cash, or liquidated, right away. This list includes your savings, checking and money market accounts, plus the money in your wallet. It also includes the cash value of life insurance policies.
Next, make a list of the current value of all your personal property assets. Personal property assets are things you own that you can sell. This includes the fair market value of your home, car, stereo, jewelry, electronic and video equipment, books, or any other item of monetary value.
Then add together the value of your investment assets. These are the stocks, bonds, CDs, mutual funds, IRAs, and other investments that are not available on demand.
When totaled up, these three categories make up your total assets.
Now, calculate your liabilities. To calculate you liabilities, add up every debt you owe. This list includes credit card debt, auto loans, the mortgage, student loans and debts owed to individuals.
Finally, subtract your liabilities from your assets. What did you find? Are you doing well, or are you deep in debt?
With the recent downturn of the housing market, many have found themselves with a backwards mortgage, where they owe more than their home is worth. Knowing where you stand financially can help you make better decisions and meet your goals faster. When you lay out what you have against what you owe in two columns, it becomes clear what the next step needs to be.