UNDERSTANDING YOUR FINANCIAL POSITION

DO YOU KNOW HOW TO DETERMINE YOUR FINANCIAL POSITION?

Understanding your financial position starts with knowing how to  calculate your net worth. It puts your money into perspective by looking at yourself in a mirror and  determining whether you like the image of your financial position.

Surprisingly, not many people know and practice the habit of calculating their net worth. Even those who know hardly do the actual calculation at least twice a year (June and December, if your financial year runs from 1st Jan. to 31st Dec.)

Frequently Asked Questions

1. How does one calculate his or her net worth?

2. Is a net worth statement  the same as a balance sheet?

3. Is a car or home an asset or liability?

4. Why is it necessary to calculate your net worth?

5. How can one determine the current monetary value of his or her assets?

Net Worth

It is the difference between what is owned (assets) and what is owed  (liabilities).

Net worth = Assets - Liabilities

An asset is anything that has monetary value and can generate income or cash flow. Assets are classified into two: fixed and current.

Fixed assets aren't easily converted into cash especially during an emergency: fixed property (e.g. land, home, apartments etc). Current assets are readily converted into cash e.g. stocks, government securities, unit trusts, goods, savings in bank account or M-shwari etc.

A home, land or car may be considered a liability if not generating cash flow. 

Liabilities are financial commitments that you have to pay i.e they take away your money (cost you). Examples include: loans, bills, penalties etc.

When calculating your net worth, consider the present market value of your assets and the current remaining balance of your loan (principal plus interest). Personal belongings too should be factored even though they depreciate in value.

Balance Sheet

It is a financial statement that shows the actual calculation of your net worth, with a detailed illustration of the specific assets and liabilities.

Steps of Preparing a Balance Sheet

1. Collect and file all your financial documents.

2. Classify and record all the details about assets and liabilities.

3. Calculate the difference between the total value of assets and liabilities.

Importance of Calculating Net Worth

1. It helps you determine the number of months or years you can survive if you were to retire today, lose your job or source of  income. 

2. Helps you understand your actual financial position.

3. Helps you plan for your future.

A positive net worth means you own or generate more than you owe other people/institutions as loans and debts. A negative one* implies you owe or spend more than what you generate or own as assets.

Ideally your net worth should grow with time but this is not usually the case. You can increase your net worth by paying down your bad debts and/or increasing your income streams.

Q. Do you know your current net worth?

If YES, how are using it to improve your financial wellness?

 If NO, take heed and learn.

Note: You can get a copy of "Mastering Your Money" for more details on the above subject (See Chapter 10).

#KnowYourNetWorth

#PrepareYourBalanceSheet

#MasterYourMoney

#Chachanomics101

www.chachanomics.co.ke

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