"Your greatest asset is your earning ability, your greatest resource is your time," quote attributed to American Television Host, Brian Tracy; if this quote is true, then it means, we all have what it takes to increase our net worth (by compounding our assets and annihilate our liabilities). But what are these personal assets and liabilities from financial point of view? and how do they contribute to one's personal net-worth?
If you apply for an unsecured loan from any responsible lender, they will run through some personal questions to establish your credit worthiness i.e. ability to service the loan repayment by going through your income and expenditure, establishing whether your personal finances run on deficit or surplus. If you apply for a secured loan, your financier would want to know not only your credit worthiness but also your net worth as well by establishing your assets and liabilities.
An asset is anything owned by an individual (or organization) that can (potential to) generate income, in other words it is anything that has economic value which could be converted to cash; for instance a car, property, 'skills', cash, securities, bonds, etc
Liability on the other hand is anything that which takes cash from an individual, for instance a loan, mortgage, store cards, credit cards etc. Liability is also defined as an obligation that binds an individual (or organization) to settle a debt.
Most people think of their houses (bought on mortgage as primary domicile property) is an asset. Strictly speaking, it is only an asset in a long term (assuming that in the long term the property value will increase-we've all witnessed in the recent recession, house values have gone into negative equity i.e. purchase value being greater than current property market value). In a short term though, the house you live in (and the car that you drive) is really a liability as it takes away from your income with no short term returns.
A person's net worth is thus computed from the difference between one's asset and liability - if all of one's assets are sold and the cash generated used to pay off one's liabilities (debts, obligations) what is left is the person's net worth. This means, it is possible to have negative net-worth, i.e. when total value of assets is less than total liabilities.
Forbes (Nov, 2009, website) published that Bill Gates, net-worth estimated to be US $22bn, has regained his title as the world richest man, overtaking Warren Buffet whose net worth was estimated to be US $12bn (both affected by recent recession, Gates lost $18bn whilst Buffet lost $25bn). These two billionaires had their net worth decreased drastically by decrease in their assets. Another way of decreasing one's net-worth is by increasing one's liabilities.
I did a quick survey of twelve adults I know socially and it turn out none of them knew their net worth and only 3 out of 12 (25%) knew what net-worth was and how it is computed from one's financial data (information). This is sad because a person's net worth is the greatest leverage (financial muscle) that one can have and use in the financial arena.
