Financial Health Check (Assets & Liabilities)

It\’s easy to go over a topic and not slow down enough to define terms and why those terms are so important. For many of us, we have heard the words \”assets\” and \”liabilities\” for years; for others, these may be brand new terms. They are terms that relate to everyone\’s financial picture, whether you carry debt or own anything, as they are both factored into your net worth—another term that we\’ll explore in the Financial Health Check series.

You can use the word \”asset\” to imply something of great value, like a team member. It can also be loosely used in the military when referring to resources. In the world of finances, you will typically hear it refer to something that is owned or, more loosely, something in which you have partial ownership and equity.

Here\’s the legal definition: \”The term \’assets\’ refers to things owned by people or entities that have, or are expected to have, economic value.

Assets can come in many forms including cash, bank accounts, investments, collectible items, personal possessions, and real property. The value of an individual\’s or entity\’s assets is offset by the amount of their debts, and comes into play when seeking financing for something, or when the individual dies.\”

However, the term \”liability\” refers to a risk of some kind, especially in a corporate setting. Most people use the word in its proper financial form, referring to what you owe and what you\’re responsible for repaying. A liability offsets what you own when calculating your net worth.

So, what should be categorized as an asset, and why does it matter?

Calculating an individual\’s net worth is primarily a financial indicator pointing to their free and clear portion of what they own or their monetary worth, and defining assets can be a difficult task.

You may have heard American businessman, Robert Kiyosaki, speak about your home not being an asset, and instead a liability. You can logically argue that the portion of equity you have is the asset portion. However, most would argue that even if they have a mortgage on their home, they own it. Therefore, it is their asset in its entirety.

Other examples of assets include other property besides a primary residence, along with your business inventory, a vehicle you may own, or items like gold, silver, cash, and bitcoin.

As previously mentioned, your liabilities offset your resources. Examples of this may be your mortgage, HELOC, student loans, medical or auto loan debt. Lease payments as obligations are also liabilities to factor in.

Assets and liabilities are factored into the equation that calculates your net worth.

Many people do not know their net worth, much less how many assets or liabilities they have. This will help you as a means of tracking to ensure you are aware of your financial standing.

Let\’s put this concept into practice: let\’s say that you own a home, and its current market value is $365,000. However, you only owe $312,000. Effectively your net worth off of this investment alone is $53,000. You may have a car that is now free and clear and has a market value of $32,000. Since you have no loan on this vehicle, the $32,000 contributes directly to your net worth from your property, increasing the total to $85,000. You then take an inventory of your home, looking at furnishings, appliances, and other contents. Other than a furniture store card with your couch on it, there is no debt. If the contents are worth $26,000, and the loan is $3,800, you will effectively have another $22,200 added to your net worth, bringing it up to $107,500. This is an example of how you can effectively examine your assets and liabilities.

CTA:

Consider all of your assets and liabilities and write down what you own and what you owe as of today.

Citations:

\”Asset.\” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/asset. Accessed 26 May. 2020.

\”Liability.\” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/liability. Accessed 26 May. 2020.

\”Assets.\” Legal Dictionary, 25 April 2015, https://legaldictionary.net/assets/.