Net worth
- It is the total value of your wealth
- Calculated as Total Assets – Total Liabilities
- A positive (increasing) net worth indicates that you have more assets than liabilities, which is a good thing
- A negative (decreasing) net worth shows that you have more liabilities than assets, therefore you may need help on personal financial planning
Real Net Worth
- It is total value of your wealth less personal use assets
- Calculated as Net Worth – Total Personal Use Assets
- In other words; Real Net Worth = Investment Assets + Liquid Assets – Total Liabilities
- You should spend more money in investment assets than personal use assets in order to create more wealth
Asset
- Any physical or intellectual property that hold which raises your net worth or income
- For example, a rental building, rental car, business – and others
- Classes of assets are liquid assets, investment assets, and personal use assets including other valuable possessions
Liquid Assets
- Include cash (money in hand, mobile money etc.) and cash equivalents
- Cash Equivalents are liquid assets that can be converted into cash very quickly
- Examples: treasury bills (91-182 days), money market funds, merry go round / table banking
Investment Assets
- Comprise items that generate substantial income including higher fixed income and growth potential, depending on risk tolerance
- Examples: Treasury bills (364 days), treasury bonds, corporate bonds, bond funds, Savings and Credit Co-operative Societies (SACCO) shares, Real Estate Investment Trusts (REiTs), Rental property, farm land, stocks / shares (securities exchange), private equity / shares in own business, equity funds, balanced funds, investment linked life assurance policies, retirement schemes, investment groups – and others.
Personal Use Assets
- Consist of items of basic needs and others that people acquire to gratify egos, social approval or an elevated lifestyle
- Are “liabilities” in that they do not earn any money, instead, you spend money on them e.g. maintenance costs of a car, house etc.
- Examples: Personal or family residential house / home, personal cars, household furniture and properties etc.
- However, basic needs like housing, clothing and food must be affordable and meet the desired use
Liability
- Liabilities include loans, debts and financial obligations that you owe to others and it needs to be paid back
- They can be acquired to finance investments and personal use assets
- A liability also means something that costs you money without a compensating income, e.g. a residential house or personal use car that incurs maintenance costs
- A liability is not necessarily a bad thing; such as mortgage to purchase a home or a loan to finance a well-managed business
- Before taking a debt, consider that:
- It must be affordable and
- Benefit delivered from the loan must be higher than the cost of debt (interest)
Investment Liabilities
- Are loans acquired to finance investment opportunities like rental property, agricultural land, a commercial venture etc.
- Also referred to as good debts in the sense that they are used to finance income generating ventures or appreciating asset
- Caution on investment debts:
- Get correct information about investment before taking the debt. This is because you will still be required to pay the debt even if the asset fails
- Ensure the return from the investment is more than the cost of the debt
Personal Liabilities
- Personal loans are acquired to finance personal use assets and other possessions, examples:
- Home mortgage
- Car loans
- Credit cards
- School loans
- Equipment Loans (Asset Financing) etc.
- Also referred to as bad debts, because the:
- Personal use assets acquired do not generate income and
Benefits accruing from their use may be less than the costs of acquiring and maintaining them