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| Identifying Your Current Financial Status for Financial Planning |
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| Written by The RupeeManager Team | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Friday, 04 November 2011 22:05 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For planning our finances, we wrote about the steps here and discussed step 1 here. Now we need to discuss step 3, which is about identifying our networth. Our networth is the difference between our assets and liabilities.
Generally speaking financial assets are assets that derives value because of a contractual claim. Stocks, bonds, bank deposits, life insurance policies, annuities and the like are all examples of financial assets. In other words, asset is a possession that generally increases in value or provides a return.
Land and property are physical assets--financial assets do not necessarily have physical worth. The market value of a house is an asset and the mortgage is a liability. Let's say you had purchased a house worth Rs. 12,00,000, but your mortgage is Rs. 8,00,000. That means your contribution for the house is Rs. 4,00,000. Your contribution towards purchase of your house add up to your net worth. Goods like Scooters, Cars, big-screen TV, Refrigerator and clothes are assets, but they aren't wealth-creating assets because they don't earn money or rise in value. On the contrary a new car drops in value the second it's driven off the showroom. Car is used by us for convenience to us to work, but it's not a wealth-creating asset. Create asset inventory that will list the major financial assets that you possess, their value and return that they fetch. Physical assets, artifacts, personal effects like clothes, electrical/electronic appliance, etc. The emphasis of creating inventory is on your financial assets that you hold with a view that these assets will generate some income in the form of interest, dividend or appreciation in value. After creating an inventory we will use the inventory information to analyse and rearrange your asset portfolio by changing the proportion of assets in such a way that it utilises the sound practice of diversification of assets in order to obtain a "blend" of risk and reward. For this purpose, the entries for your investments should be fairly detailed. Each entry should be recorded in the following format :
In finance a liability is defined as an obligation of an entity arising from past transactions or events. The settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. In other words, a liability means debt i.e. money you have taken as a loan such as;
Each entry of liability should be recorded in the following format
The difference between your assets and your liabilities constitute your networth and your net worth is your wealth. When borrowing are more than your investments, your networth is negative and if your investments are more than your borrowings your net worth is said to be positive. To calculate your networth prepare a balance sheet
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