NOW i KNOW ! Newsletter No. 01-2016
How much financially-worth are we? 100 million? Couple of billions? Sort of trillions? Try to find out how much financially worth we are. We might find out that we are wealthier than we think, or maybe we are not that wealthy as we used to think, or maybe that our finance need some extra attention. Net worth is a measure of one’s wealthiness. Wealthiness should go along with a healthiness in financials. Measuring our wealthiness is one means to ensure financial health. This current newsletter elaborates ideas to understand what’s your net worth, identify your state of financial healthiness, and metrics to ensure financial healthiness.
What’s Your Net Worth? Valuating your assets, debts, and eventually, your net worth.
Net Worth Equals Wealth Knowing your net worth is important as initial steps to knowing how financially healthy you are. Your net worth is the difference between your assets and your liabilities (or debts). This figure is a measure of your wealth as it represents what you own after everything you owe has been paid off. For you to know your net worth, you have to understand your assets’ value as well as your debts.
Valuating Your Assets Your asset is any property or thing you owned that is regarded as having monetary value. Having monetary value, an asset can be sold, it can be used to pay debts, and it can even be passed-on to your legacies. Your asset can be in a form of cash, deposits, estate property, vehicle, investment, jewelry, other belongings, and so on. The first step in valuating your assets is to list them down. Once your assets have been listed, you then need to estimate a monetary value on each of your asset. See the next table for an example of an assets listing and their valuation. For the purpose of discussion in this newsletter, let’s pretend that they are your assets.
Your Assets as per date 31 December 2015 List of Asset Cash on Hand Savings Time Deposits Gold Bars Stocks Mutual Funds Employee Stock Option Paintings & Collections 1st Car 2nd Car 1st Motorcycle 2nd Motorcycle House Land
Asset Value (in Million Rp) 10 150 180 40 20 90 40 30 250 420 20 50 2,200 300
3,800 Total Assets, in million Rupiah
Looking at the table of your assets list, your asset therefore is in total of 3.8 billion rupiah.
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Note that your assets’ value is dynamic over the time, thus mentioning an asset status date is just as important. In this example, your asset is valued at 3.8 billion rupiah as per date 31-December-2015. When valuating your assets, you should estimate the monetary value of your assets as if you are selling them right now, immediately. It is not the purchased price when you acquired the asset. Some assets (like cars) loose value over time; and other assets (like house and land) grow value over period. It is advisable to value them conservatively, again, assuming as if you are selling the asset immediately in need for cash.
Counting Your Debts
Your Debts as per date 31 December 2015 List of Debts
Debt Value (in Million Rp)
1st Car Loan
180
2nd Car Loan
300
1st Motorcycle Loan
10
2nd Motorcycle Loan
30
House Loan Non-collateral Loan Credit Card Loan
1,800 300 80
2,700 Total Debts, in million Rupiah
Once you know your asset value, next is to find out how much debt you owe (if you have one). Debt is simply the amount of money that you owe to other party, such as typically to the bank. Assuming that you have some debts, first you need to list down all the debt items you have; and second, you need to know how much outstanding or remaining debt you owe of each debt item.
Now you know that you have a total debt of 2.7 billion rupiah.
Debts is also dynamic over the time that you need to determine the date status of the debts. Your debt in this example is on status as per 31-December2015. See the table above, an example of your outstanding or remaining debt.
Your net worth is the difference between your assets and your debts, that is your assets minus your debts. When you do the calculation and you find your net worth negative, it means you have debts more than your asset, and most probably you are financially in trouble. A negative net worth indicates that all your assets are actually financed from the debts, or it can be said that your assets are owned by the creditors, or in other word you are asset-less.
Earlier you have known your total assets, now you can calculate how much your net worth is.
What’s Your Net Worth?
As a general principle, you must have assets more than your debts. The greater the assets compared to debts, the better. With that principle, you must have assets enough to cover your debts.
Your Net Worth as per date 31 December 2015 Assets
3,800
Debts
2,700
1,100 Net Worth, in million Rupiah
As per date of 31-December-2015, your net worth is 1.1 billion rupiah. Your net worth in this example is positive, and that’s good. You have assets more than your debts.
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Are you Financially Healthy?
Conclusion
Having a negative net worth is for sure showing an unhealthy financial condition. A positive net worth indicates a good financial condition. Taking you further to knowing a positive net worth, you should also understand how financially healthy you are from the perspective of assets and debts.
There are two ways to increase your net worth: (1) increase your assets; or (2) decrease your debts. You can increase assets by increasing your cash or increasing the value of assets you own.
The Debt-to-Asset Ratio is one measure to indicate a financial health. You compare your debt over your asset, that is dividing your debt value by your asset value. Debt
=…%
Asset
In the example, your debt of 2.7 billion rupiah is divided by your asset of 3.8 billion rupiah, and the result is a ratio in a percentage value of 71%. What does this ratio mean? What is considered a healthy ratio? A Debt-to-Asset Ratio of less than 50% is the ratio value for a healthy finance. The ratio value between your debt and your assets should be maximum at 50%, if you want to be considered having a healthy financial condition. The Debt-to-Asset Ratio of 71% in this example indicates an unhealthy financial conditions. It means that 71% of your assets is financed by debts, or simply 71% of assets are not yours.
Increasing your net worth through an asset increase will work if the increase in assets is greater than the increase in debts. When you increase your asset, make sure you don’t increase the debt along. For example, your assets will increase if you buy a house, but if you take out a mortgage on that house your debts will also increase. The same goes for decreasing your debts. The decrease in what you owe must be greater than the reduction in assets. To be financially healthy from the perspective of assets and debts, you can set two targets to work on finance: First, ensure you have a positive net worth; and Second, maintain a Debt-to-Asset ratio of less than 50%, the lesser the better. You meet the two financial measures on assets and debts above, and you should be having a healthy financial conditions.
By Iswin Hudiarto The writer is Principal Financial Planner and Director of Cikaldana Financial Advisory.
PT Cikaldana Korpora Sovereign Plaza 21st Floor, Jl. TB Simatupang Kav.36, Jakarta 12430 P: +62 21 2939 8727 F: +62 21 2939 8898 www.cikaldana.com E-mail: contact@cikaldana.com
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