Determining your net worth

This article will look at how to determine your net worth. In order to compute the net worth of your assets, you need to know the two main components in deriving your net worth:

• Assets; and
• Liabilities.

What are assets and liabilities? An asset in simple terms, is something you own whereas a liability is something that you owe.

Understanding Assets

Assets can be categorised as investment assets and non-investment assets. Investment assets are assets that generate cash flow, and can materialise in the form of dividend, capital gain, rental or income. Examples of investment assets would include savings, fixed deposits, stocks, unit trust investments, EPF, investment properties as well as your businesses.

Non-investment assets on the other hand are assets that do not generate any cash flow. Examples of non-investment assets are the houses you purchase to live in or stay during vacations, as well as your car. Even though owning these assets have become part of our “must-have” items for each family, they do not unfortunately enough, help generate income or bring in any cash flow.

Understanding Liabilities

As mentioned earlier, a liability is something that you owe. This would naturally include your outstanding credit card payments, car loans and housing loans. Liabilities can dry up most of your income. As such, in order to obtain financial freedom, you need to first establish yourself as a debt-free individual. Having liabilities mean, you would need to serve interest on those liabilities. Thus, you would have to clear your liabilities as soon as possible. The longer you hold on to your liabilities, the more they eat into your reserves if you are unable to generate returns higher than the interest costs that you are obliged to serve.

Understanding Net Worth

Your net worth is how many assets you have left over after paying off all your liabilities. To a banker, your net worth is simply the difference between your total assets and total liabilities. However, in order to achieve financial freedom, you need to own enough investment assets that can generate sufficient cash flows to cover your daily expenses as well as your lifestyle. Hence, your net worth in the context of financial freedom is the difference between your investment assets and total liabilities.