Do you know what an asset is? How about a liability? Many probably have an idea on what they are but how many actually understand these terms? True, it might sound boring for many. Unfortunately, these terms are part of the basic terms that everyone should know about personal finance. A deeper understanding of these two terms can lead to drastic improvement on the current stage of your financial life. So, what is the importance of assets and liabilities in personal finance?
Assets vs Liabilities
An asset is any resource that has monetary value. In short, in personal finance, an asset is anything that you own that has value. Your car, house, investments, cash and items such as antique furniture, artworks, watches, jewelries and even some luxury things are all considered assets.
On the other hand, liabilities are everything that you owe. They can be in the form of mortgages, loans, debts and any money that you owe others.
Your total assets minus all your liabilities is your net worth. Knowing your net worth will help you understand your current financial situation. If it is positive, then good for you. If it is negative, then it is a warning sign that you are living beyond your means. In addition, your net worth can serve as reference point in your financial goals.
Compute your personal net worth now. Knowing your current state of your finances will help you improve your financial life. Your current net worth will be your starting point in your financial journey.
1. Compute all your Assets
Start by making a list of all your assets. Your assets include the following:
- Real Estate Properties
- Cash deposits
- Investments on businesses, bonds, stocks, funds, etc.
- Watches and Jewelries
- Other items such as antiques, art works and luxury items
Then, place a monetary value on each one. Record the estimated current market value not the purchase price.
Add then add them all up. The total value is your assets.
2. Compute all your Liabilities
- Real estate mortgages
- Auto loans
- Credit card balances
- Student loans
- Other personal loans
Add up all the outstanding balances to get your total liabilities.
3. Calculate Your Net Worth
Now, subtract your total liabilities from your total assets. Then, that’s your net worth.
Do this every month to monitor your progress. Your goal is to slowly increase your net worth.
Now that you know your net worth, it helps to keep this in mind each time you spend your hard earned money. Knowing your net worth will help you make good financial decisions.
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