Understanding Your Financial Net Worth

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Your assets are referred to as things that you own. These things can be divided basically into two categories, financial assets, and non-financial assets. These two carry a very important distinction as they are directly related to your cash flow and liquidity which we will discuss in the next issue. For now, let’s discuss financial assets; these are mainly your cash and your cash equivalent accounts. Therefore, any savings account or any non-registered accounts will count for cash or cash equivalent. Not all financial assets can be quickly converted into cash without suffering a significant loss. Take for example an RRSP, taxes which have to be paid can take a significant chunk out of it. These would now be referred to as your investment assets. They typically include your TFSA, RRSP, RESP any bonds or stocks, annuities or life insurance cash values, especially on universal life policies.

Now to look at non-financial assets; typically your primary residence albeit your most valuable asset is not a financial asset. Any other real estate, cottage, vehicles, equity held in corporations and even land are categorized as non-financial assets. Personal assets such as jewellery, clothes, paintings, tools and the like are still non-financial. Some non-financial assets are meant to be investment assets as well. Take for example you have a rental property, it is non-financial but it is providing a cash flow.

What are your liabilities? Well, the first places to look at are where you have borrowed money from and whom you owe. Whenever you borrow you incur a debt and this debt needs to be repaid, examples are credit cards, instalment loans, mortgages, furniture loans, vacation loans etc, these are the most common type of liabilities. Some liabilities are tied to investments. For example, someone may borrow ten thousand dollars on a leveraged investment paying 3% interest to the bank while earning 5% at the investment company. Or they may have bought a rental property on a mortgage but are receiving a monthly income that is servicing the loan. So not all liabilities mean bad news, however, if you buy a depreciating asset and you owe more than it is valued, then that is bad news.

To calculate your net worth, simply take all of your assets, list them on one side of the page and take all of your liabilities and list them on the other side of the page and the formula is total assets minus total liabilities equals your net worth. Why is calculating your net worth important you ask, because you ideally should be increasing your net worth year after year. Certainly you would not like to see your bank account drop in value, and so shouldn’t your net worth. What if your net worth is negative? This is a serious position to be in as someone may be responsible for paying off your debts should you become sick, disabled or even die. Financial advisors help you calculate your net worth, analyze your cash flow and calculate your dependent’s income needs. If you haven’t done this exercise as yet, it might be very useful to you as a measure of protecting your family’s well-being and making sure that if something happens to you that you don’t leave your family with too much liability that they couldn’t handle.


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