In considering the choices in handling the money that pass through our hands, we note that funds spent on the mortgage, the car and life insurance, for example, all have some element of investing.
It is important still to appreciate that funds expended on food, clothing and entertainment have some element of investment, too. To the extent that you can expect to get some future benefit from any of these expenditures, that benefit would be the return on the investment portion of those expenditures. Just recall trite phrases like eat healthy, stay healthy; dress for success; and read for a degree and for a better job and you get the kernel of the idea.
With regard to clothing in particular, some people buy clothing that lasts for years, whereas others change their wardrobe with the fashion of the day. Such benefits are hard to quantify, so we usually ignore them. However, thinking of the expenses as partly investments is still very useful as it help us to consider leveraging the best return possible.
Our consumption or spending represents the amounts that we allow to leak from our glass to pay for expenses. The extent to which you can control this leakage will determine the funds remaining in that glass, your savings or investments. So it is important that we look over all our expenditure and try to identify the consumption and the investment in every one. What are we managing to retain in our glass?
That brings us to our net worth. Personal net worth or net assets is the sum of the value of all our assets less the value of all our liabilities.
Our net worth statement presents our value at a particular point in time.
It is the balance sheet of our lives at that specific date. In banking circles, it is called our statement of affairs.
First, let us set a date for this evaluation. Everything else then relates to the value at that date.
Then let us list and total all our assets: cash, bank balances, investments, amount owned of mortgaged properties, real estate wholly owned, amount owned in the current value of vehicle(s), insurance cash surrender values, accounts receivable (total of funds owed to us), jewellery, and so on.
Next, list our liabilities. This is where we list funds which we owe to other parties, such as bank loans, mortgage(s), personal loans, credit card debt or similar debt.
Having completed the full list of assets and liabilities, our net worth is an easy next step.
Our total assets minus the total of our liabilities is our net worth.
We can check this computation. If we have done the calculation correctly, then the totals will match – that is: our total assets will be the same as the total of our liabilities and net worth.
It is important that we are conservative and accurate in valuing assets. That is because when we submit our statement of affairs to the bank, the banker will typically have a more conservative view of our assets than we do. Bankers will often consider the liquidation values which tend to be lower.
For liabilities, we can confirm our understanding of the debt with the debtor.
If we have ever been told that we were worthless, after today, we will be able to put some real value on ourselves. Checking the growth in our net worth from year to year reveals how much we’re letting flow out of our glasses as consumption and how much we are retaining.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.
