Knowing Your Net Worth is The First Step

financial statementsPoliticians in the Philippines are known to exhibit a certain degree of aversion against producing their own Statements of Assets and Liabilities and Net Worth (SALN) for public scrutiny. This is because these public officials will be hard-pressed to explain increases in the level of their net worth stated on their SALN. Unexplainable wealth accumulation can only mean one thing as far as the people are concerned, the politician must have acquired the assets through corruption.

But even if we aren’t public officials, preparing our own personal financial statements is critically important if we want to improve our financial standing. Knowing where we are should be the first order of business before we can imagine where we want to go and how we can get there. A personal financial statement or balance sheet will spell out for us what we own, what we owe and our net worth in a particular moment in time. Although only a few people bother to prepare their own personal financial statement, those that do can get the following benefits:
  1. It gives them the awareness of the things that should be a concern regarding their financial situation.
  2. By regularly doing it, they will be able to monitor the progress of their financial goals.
  3. It will also tell them whether or not they can take riskier investments or if they should just stick with the safe portfolios.
Basically, the personal balance sheet should contain three things.
  1. What we own – Assets
  2. What we owe – Liabilities
  3. The difference between the two – Net Worth
What Are Assets?
Assets are the things we own including cash, money in the bank, properties, investments, businesses, etc. In listing down these assets we need to indicate their worth at present. This means that if we were to sell these assets today, the amount we would get is the value of the asset that we should indicate in our balance sheet. This concept is important to understand because the value of the asset can increase or decrease depending on what type of asset it is. For example, a car will depreciate in value by approximately 10 % a year while a stocks investment may appreciate by a large percentage in a few months. The balance sheet is a snapshot of the value of the assets in a particular instant which leaves no doubt as to how much it was worth at the time of the statement.

How About Liabilities?
Liabilities on the other hand, are the things we owe others such as mortgages, debts, loans, etc. which we need to pay sooner or later. Debts are usually associated with a certain level of interest rate which is used to compute the cost of borrowing money we need to pay. We should always strive to get the lowest interest rate when we borrow for obvious reasons. There can be several alternatives whenever a loan is inevitable and the best choice is whichever carries the least interest rate. A credit card, for example, is one of the worst sources of debt since its interest charges are quite high.

Assets Minus Liabilities Equals Net Worth
Once we know the value of all our assets and subtract from that the value of all our liabilities, we would know our net worth. Since these values are not fixed, with assets depreciating or appreciating and liabilities changing too, our net worth changes over time as well. It should be our aim to increase our net worth in order to achieve the financial freedom we aspire for. We can only do this by aiming to acquire assets that appreciate in value such as real-estates and investments while we reduce our liabilities by avoiding debts as much as possible or by paying them off as soon as possible to decrease our interest expense.