The net worth of an individual is calculated by deducting their liabilities from their assets. Over a period of time, the assets can grow in value and the liabilities can decrease. As a result, the future net worth increases considerably as compared to the present situation.
There are all sorts of things a person can own whose value may increase their future net worth. For example, property and other valuable possessions have a higher chance of increasing in value, according to many factors. Some of the other assets might include,
- Investments such as stocks, bonds and mutual funds
- Self-owned businesses
- Jewellery, art and other similar possessions
- Cars and other vehicles
- Cash (CDs, savings account and others)
In very basic terms, assets are usually things which have a relatively higher monetary value. They can be easily converted into cash as there is an existing demand for them in the market. All of the above-mentioned items boast of a solid demand and thus, the value in the market. As the time passes, the demand for most of these assets is expected to increase.
On the flip side, there are other smaller assets which are difficult to sell and therefore are not usually included. For example, a person can sell their old electronics for a small amount of money. But the price of such things cannot be predicted easily. Moreover, they might not fetch a considerable amount and hence are not included while assessing the overall worth of an individual.
Compared to assets, liabilities are easier to comprehend. Mortgages and other debts that an individual conjures up during their formative years end up being their liabilities. They can be either or all of the below:
- Bank loans
- Personal loans
- Credit card debt
- Car loans
As you can clearly observe, most of these debt obligations are very natural for an individual with an average income. They take a substantial bite out of all future incomes but are necessary for the overall growth. In fact, during early years, it is common to have a negative income as young people owe different financial institutions more than they actually own. But as they grow, the liabilities are slowly paid off and the wealth starts to accumulate. Most of these debts help in some way to increase the future net worth too. For example, car loan lets a person own a car, which is an asset. Similarly, a student or a personal loan might help in building another asset, such as a business, which can substantially add up to the future income. Similarly, mortgages will help a person fully own their house in the future, which is another substantial asset. As we can clearly see, liabilities have the power to create exponential wealth and can increase the future net worth considerably.
To reach a certain position in life, it is absolutely critical to know the current position. The best way to do that is to generate a personal net worth statement. In the long run, information about one’s assets and liabilities helps a person to carefully plan their financial policy. In the long run, there will be a lot of fluctuation in assets and liabilities in any case, according to various factors such as health, natural causes and even luck. But a clear financial policy and agenda is the most reliable key to increase the future net worth.