Your Financial Net Worth is one of the indicators that illustrate the ability to achieve financial goals for the short, medium or long term. Basically, it is the result of subtracting your liabilities worth from your assets valuation; that is to say:
Financial Net Worth = Financial Assets – Financial Liabilities
First things first:
To calculate your total Financial Assets, you must know that the most important thing to keep in mind is that your assets correspond to the physical cash you possess to purchase things either now or later. You can also consider as financial assets, those investments that can be converted into fiat money. Consumer goods, such as your clothes, TV, washing machine, furniture and fixtures (unless you’re thinking of selling them) should not be considered as financial assets because they do not contribute to putting money in your pocket.
On the other hand, generally, Financial Liabilities include all debts that you have and any other payment commitment or contractual obligation you have acquired and that involves paying in cash or handing over a financial asset. There are short and long term liabilities, enforceable and unenforceable, contingent liabilities and other, but we’ll leave that for later. For now, the important thing is that you recognize the fundamental differences between assets and financial liabilities.
A simple way to understand the difference between assets and liabilities, is assuming that an asset is anything that puts money in your pocket and a liability is anything that takes it away from you.
Each person, depending on their circumstances, interests and goals, will interpret in one way or another the value obtained by subtracting liabilities from assets; but in any case, a very good recommendation is that you calculate your Financial Net Worth now. Know how much money you have, how much you owe and how much you have left, and then act trying to eliminate the debts of major importance so that once you’ve cleaned up your finances, you begin to build a financial base that allows you to live comfortably (without strain) for at least three months.
Thus, without realizing it, you’ll be starting to get your financial freedom and you may regret not having done so before.