In a typical Tanzanian community, it is common to witness much emphasis being put on the importance of periodic health checkups. Today we will, however, deviate a bit and have a look at the importance of periodic checks on personal financial position.
What is your net worth?
Before you take time and exercise your cerebrum trying to navigate through the possible answer(s) to this question, I urge you to take time and reflect on how different companies and institutions within different industries, take quality time to do periodic checks on their financial position.
Three financial statements are commonly prepared to facilitate this namely; the cashflow statement, the profit and loss statement and the balance sheet statement. The management and the board of these institutions are expected to be true to the numbers reflected on such statements for them to depict the true picture of their institutions’ financial position.
The very same approach should be used while establishing your personal financial position. The rule of thumb before commencing this exercise is to be true to yourself no matter how hard or painful it might be. At this point you are the board and the management of your own.
To answer the question of your net worth; we are going to have a look at a personal balance sheet statement and its components, thus: Net worth = Personal assets (what you own) – Personal liabilities (what you owe).
Personal assets are all items owned by a person or a household that carry monetary value or you can turn into cash such as real estate (houses and land), cash in hand and at banks, cars and jewel. Personal liabilities are obligations that you have or amounts that you owe to others such as mortgage, outstanding loan and post-paid utility bills.
In some circumstances some items can fall into both categories for instance if you take a cash loan from the bank, the cash obtained is an asset to you but also since you have created a debt, the same loan amount plus expected interest that will arise from it should be recorded as a liability.
How do I know if I have a positive or negative net worth?
Personal assets – personal liabilities = (-) then you have a negative net worth while personal assets – personal liabilities = (+) then you have a positive net worth.
How can I maintain a positive net worth?
You should always aim at maintaining and growing a positive net worth by investing in assets which either appreciate in value over time or generate income and have low maintenance cost. It is said, know what you own and why you own it.
How often should I update my personal balance sheet?
It is important to update your personal balance sheet from time to time, preferably semi-annually. In this digital era, you may consider using several legit personal finance applications available in the market to simplify this exercise.
Having an updated personal balance sheet carries several advantages including enabling you to prepare for your retirement plan. Hopefully, you will be able to answer the earlier question on your net worth and this will help you towards building a healthy and sustainable financial position.