Calculating your net worth would appear to be a relatively simple task, being the sum total of your assets, less any debt, taxes and fees should such assets be sold. This includes everything that has a value, from your property through to savings, retirement accounts and investments. If your net worth is zero or in the negative, it then becomes the remainder of any debt that would be left after selling everything that has a value, emptying all accounts and then using this amount to reduce the debt.
Normally, it is accepted that selling your home and car may not be practical or quick, also, many savings and retirement plans cannot be immediately turned into cash. This means that, in reality, your net worth may not be an actual indication of the true amount that could be easily and quickly liquidated. However, knowing your net worth is an extremely useful way of gauging how several, often diverse, investments and personal finances can come together, allowing you to encourage net growth rather than to diminish it.
What are liabilities?
There are very few of us who do not have liabilities, as these are our legally binding obligations to pay another person or equity, such as a mortgage or finance for a car. Each time we borrow more money, our liability increases, and, as we repay, so it reduces. Liabilities can be settled by a transfer of funds, services or goods and as a liability is often also a source of funding, it can be used to support or increase the assets of a business or enterprise. There are many different forms of liabilities and some examples are listed here:
- Outstanding accounts that need to be paid
- Accrued liabilities such as money that must be paid over a period of time
- Deferred revenue where payments are delayed and may accrue extra interest
- Payable interest that is due over and above the actual loan figure
- Promissory notes payable, e.g. loans that have not yet been repaid
- Taxes payable, normally at a set percentage
- Company wages payable to staff on a regular basis
There are two types of liabilities – current and long-term. A current one would be expected to be liquidated within 12 months and any others are classified as long-term. Other forms of liabilities include: provision – the reduction in value of an asset, negative – when repayment exceeds the liability and contingent – potential liability, as yet unconfirmed.
What are assets?
Assets can be tangible or intangible, but include anything of value that has been purchased or acquired. A tangible asset is physical, such as property, including houses and cars, whilst an intangible one is something which cannot readily be turned into cash, such as a trade name or a copyright. For businesses, assets will be recorded and listed accordingly on a company balance sheet: tangible assets would be listed under perhaps Equipment, Plant and Property, depending on the type of business. Intangible would be listed separately on the balance sheet, as per IAS 38 rules, as they need to be well managed in order to increase future value. Here are some additional examples of both tangible and intangible assets:
- Cash in the bank or hand is tangible
- An inventory of possessions or goods is tangible
- Land and property are tangible
- Developed and in development stage software is intangible
- Any business website is intangible
- Patented ideas and technology are intangible
There are two specific types of assets, the first being current, which includes cash, prepayments and money that you or your company are owed. The second is fixed assets which covers everything that you own, and, in the case of a company, something that will be used within the business for a minimum term of one year, including vehicles, property and fixtures and fittings.
What is passive income?
Any money that is not physically earned comes under the term ‘passive income’, creating a method of revenue with little effort. For example, a portfolio of investments, once established, requires less maintenance to sustain a certain level of income. Passive income has always been considered the ‘Holy Grail’ for most entrepreneurial types, although, usually, the initial set-up can be extremely hard work, involving a lot of research. However, once up and running, it will hopefully provide a steady income without having to do very much. There are many different ways to acquire a passive income, which do not require a huge financial investment or professional knowledge.
Examples of passive income encompass the likes of writing a blog or creating online courses including YouTube tutorials, however, don’t be led into a false sense that generating a passive income is automatically easy; it can take a long time before any revenue is forthcoming. However, once you have developed the right format, there is no reason why it shouldn’t work. Ideally, it would be something that can be set up during leisure time as, only when all avenues have been opened, will it become a method of making a good income.
How to accumulate assets?
This is the main goal of savers and investors alike, regardless of whether we are considering saving for our future or a happy retirement. One bad asset, albeit a necessary one, are cars as they depreciate in value the minute they leave the showroom. Good assets are most things tangible, such as land, property, antiques and art works. Building up a portfolio of rental properties is an excellent way to accumulate assets because, although the first one or two might be bought with a mortgage, after that they should be self-financing. Another avenue for accumulating assets are stocks and bonds which benefit from dividends. There is no doubt that asset accumulation is a powerful way for individuals to save and to reach other entrepreneurial goals.