The beginning of a new year is always an excellent time to take stock of what’s happened in your life over the past year (especially when it comes to your insurance and investments).
By now you might already have made a couple of New Year’s resolutions, but it’s also an excellent time to really calculate whether you made progress this year compared to last year.
So how do you do that?
Well, one of the first things you need to do is calculate your net asset value. Next week we’ll look at your income and expenditures, and the week after we’ll look a little closer at budgeting.
By doing this groundwork, you’re building an excellent foundation for any financial planning that might need to be done.
What you need to do is to draw up a statement of assets and liabilities. Let’s take a look at assets…
Basically, you can own two types of assets according to Gitman (1981:26):
1. Fundamental assets
Assets which are owned for the function they perform in your home. Funnily enough, cash and your home are considered to be fundamental assets (only when cash is invested is it considered to be an investment asset). Purchased your vehicle on lease? Then it cannot be considered an asset until the last payment is made.
2. Investment assets
Assets owned with the intention of earning a return on them. Examples here would be shares, gold coins, endowment policies or rental properties.
Assets can then further be broken down into:
1. Fixed assets (immovable)
This would include property, furniture, cars, and any long-term investments.
2. Current assets (movable)
This would include cash, people who owe you money, and any short-term investments.
Now you need to list each and every asset on either a spreadsheet or an exam pad with a value next to it. When it comes to houses…consider the market price of houses selling in your area, and use this as a guide.
Now let’s move on to…
Once again we can divide these into two classes:
1. Long-term liabilities
This would include things like the mortgage bond on your property.
2. Short-term liabilities
Here you would include things like an overdraft, people you owe money to, and credit cards.
You would want to list your liabilities starting from the smallest all the way down to the longest repayment periods.
Finally what you do is deduct your liabilities from your assets. The result will be your net worth.
What’s I find interesting about this exercise is…taking a look at how much of your debt is linked to buying investment assets (which increase in value) versus fundamental assets (which decrease in value).
Now what you want to do is sit down every year and compare your current net worth to the previous year’s net worth. In a perfect world your net worth should be climbing deeper and deeper into the black!
Reference: Personal Financial Management 2nd edition – Nico Swart (Juta publishers)
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