I do not like accounting, but I’ve been working in the field for the last five years. It’s boring, monotonous and does not require any creativity. On the other hand, personal finance is lot more appealing and can be fun, if you know what you’re doing. And now that I can apply some of the concepts, to my personal life, it’s not so bad.
One such concept is to calculate one’s net worth by using assets and liabilities. To calculate net worth, you simply subtract your total liabilities from your total assets. A positive net worth means that you have more assets than liabilities, whilst a negative net worth means that you have more liabilities than assets. In an ideal world, a positive net worth is desirable. But when you’re dealing with asset values that fluctuate regularly and liabilities that seem to be doubling, it can be quite hard to maintain it.
Assets
An asset is something of great value that you own. There are many types of assets including fixed, current, tangible, intangible, liquid and illiquid. Some popular examples of assets are:
- Cars
- Property (homes and land)
- Cash
- Furniture
- Investments (e.g. mutual funds, bonds etc.)
- Jewellery
- Art
Liability
A liability is something that you owe. Liabilities are usually classified as either current (to be paid off in less than one year) or long-term (to be paid off in more than one year). Some examples of liabilities are:
- Loans (e.g. student, medical, car etc.)
- Mortgages
- Taxes (e.g. property etc.)
- Credit Cards
An article written by Jeremy Vohwinkle details the following steps to calculating your net worth:
- List all of your assets and their values and total them.
- List all of your liabilities and their respective values and total them.
- Subtract your total liabilities from your total assets.
I calculated my net worth using the above steps and it was positive. Is your net worth positive or negative?