The problem is that for many increases in assets there is a commensurate increase in liabilities (eg. buying a house usually requires a mortgage). Additionally, people only make so much money at their jobs, and negotiating a raise may be difficult.

This creates a necessary limit on asset creation as spending beyond your ability to pay will accrue debt. This does not mean that someone should never buy a house or only buy a house with cash reserves, instead it is meant to illustrate the interconnected nature of assets and liabilities.

Ideally, one should pursue a strategy that allows for the beneficial movement of both assets and liabilities simultaneously. A good example of this would be investing in a 401(k).

Making Small Changes

This defers your tax-liability and increases your asset holdings. The difficulty faced by most people is that they do not have the residual income necessary to adequately increase their assets beyond their liabilities. Therefore, the most appropriate measure to undertake in order to increase net worth is to examine your spending habits or your cash outflows. Finding a new, better paying job, is not as easy as deciding to forgo dining out one day a week.

Note how you are spending money (your liabilities) and identify ways of reducing that burden. By reducing the amount needed to service debt, you increase the amount of money available to go into asset creation. Remember, decreasing liabilities is not simply about decreasing your debt payments; it is about managing your overall spending.

Decide not to buy the latest smartphone or turn off lights when you are not in a room. Small changes in behaviour can go a long way toward reducing your expenses. The bonus is that by trimming back on what you can and growing your assets, you can create more value that can be borrowed against in the future thus allowing you to increase your assets at the expense of your liabilities.

The Bottom Line

Taking the time to look into your household’s net worth can tell you many things and it really is a balancing act. Incurring a liability is not necessarily a bad thing if it means getting a new car when the old one breaks down or an education to improve job prospects.

The important thing is that we adequately and appropriately budget for these items and ensure that they add value over the long term. A new car to replace a dangerous clunker is a “good” purchase whereas buying a new convertible due to a mid-life crisis is less so.

Assets and liabilities play off of one another, improving your position in one allows you to make gains in the other. How you do this really comes down to your own personal spending habits and how quickly you want to be able to enact change to improve your financial health.

It may sound complicated but the resounding answer my friends is yes! But how do you go about the process? Well first let’s look at the detail. Public companies are required to produce reports based on their financial positions.

The fact is, you’ve already heard of this! Income statements, balance sheets, cash flow statements are all in effect the very same thing! They all paint a picture of how a firm is performing financially. Now you may not be a Bill Gates or indeed have a business at all, but the point we are making is, individuals can do exactly the same thing themselves, to outline their position fiscally! It’s called working out your net worth.

Now if you’re not a mathematician or a business expert don’t worry. Once you understand where this formula comes from everything will fall into place!

ADD UP ALL YOUR ASSETS AND THEN SUBTRACT YOUR LIABILITIES – THIS WILL GIVE YOU YOUR NET WORTH!

The natural reaction to all of this is, how can I improve my net worth? In truth it’s not really a complicated process and anyone can do it quite quickly. But in order to simplify this lets tell you about the key words here and what they mean in real terms. Once you have this basic grounding then everything else becomes much easier when dealing with your net worth!

	An asset This is anything you possess carrying a cash value. It could even be loose change in your pocket or purse. Cars, boats, bikes, bank accounts, absolutely anything with a cash value. Assets are important to you on a day to day basis and the more you have the better your financial standing. Companies look at assets in exactly the same way so the theory works for everyone.
	Market value Basically this is another term for the cash value of all your assets – this liquidation value is about real hard money in real time. Imagine what you might get if you sold all of your assets tomorrow? You are working on their overall market value!
	Net Worth When we talk about net worth we talk about how much the item would be worth today if you sold it. Individuals sometimes make the mistake of putting extra value on things because they have sentimental feelings attached to them. An asset is only worth what people are willing to pay for it at any specific time. It’s important to include your wage and other income yielded from any investments you may have.
	Liabilities These are straightforward to explain and basically amount to the money you owe others. Things like student loans, car payments, credit card debt, Gas and electric bills and of course your mortgage are all liabilities. It’s really a technical term for the debt any individual carries with them, but it’s vital in calculating net worth as you’ll find out in part two.

ANY ASSETS YOU HAVE ARE KNOWN AS ‘CASH INFLOWS’ – ANY LIABILITIES YOU HAVE ARE KNOWN AS ‘CASH OUTFLOWS’

So in part two we’ll look at increasing your net worth and what’s involved – we can go into the whole process in slightly more detail. We can then sum everything up for you and give more advice on the topic so you fully understand how things work!

CHECK OUT: www.moneymanagement.org/Community/Blogs/Blogging-for