Step 1 - Anchor Your Financial Position
Module 2: Net Worth Details
Now let’s talk about your net worth. Let’s talk about what an asset is and what a liability is. There are two basic net worth approaches you can take. The first approach is what would be for the bank’s purposes if you were to take out a loan. The second one is the way that an asset and a liability is pictured from a cash flow perspective. Let’s first take the financial institutions view of what assets and liabilities are and this is probably what you’ve learned as you grew up in your family situation. As an asset we basically all view our home, our automobiles, any savings accounts, retirement accounts we might have, furniture, jewelry, and our personal effects. To our family these are our assets. Our liabilities would be the mortgage on the home and any home-equity lines that we had in addition to the mortgage. Additionally, any loans on automobiles, furniture loans, credit card balances for sure, and any student loans or tax obligations that we’ve run up that we have to take care of. From a banking point of view if you take all of your assets on one side and you’re liabilities on the other side whatever’s left over would be your net worth. Now let’s look at this from a cash flow perspective. From a cash flow perspective an asset is something that brings money into your family and a liability is something that takes money out of your family. This is a completely different approach. In a cash flow approach your greatest asset is your ability to produce income. Whatever ability you have to get a job and produce income is your greatest asset. Your next greatest asset is the other family members’ ability to earn income. That would also produce cash flow for you. The third would be a savings account and the fourth would be the retirement plans just as in the financial sector. Now let’s look at the liabilities because this would surprise you. By definition your home is a liability not an asset. This might be hard for you to accept but your home does not bring any money into your family every month. As a matter of fact you have to mow the grass, paint the house, put on a new roof, and you have all these things is that takes money out of your pocket when you own a home. The home does not write you a check every month. In addition you have the home mortgage and any home-equity loans where everybody agrees that are liabilities. Your car is a liability because your car is not putting any money into your family every month. As a matter of fact it is taking money out of your family needing oil changes, maintenance, drop off in value, and its insurance is costing you money. It’s not earning you anything. The car loans of course we all agree and furniture loans are liabilities. The furniture is not really an asset either because the furniture is not making any money. It is just sitting there. The credit card balances are the credit card balances and that’s unsecured debt. It’s just unfortunately a situation that we have to do to get out from under. The next things are the student loans and tax obligations just like before. Another area where an asset switches to a liability is your jewelry and personal effects. Jewelry might look beautiful but it’s not bringing any money into your family and personal effects do not bring any money into your family. So those are liabilities. If we look at this from a cash flow perspective the real assets are your ability based on your training and education and your health to earn income and secondarily any other family members that have the ability to earn an income. Those are your greatest assets.