In January, as part of our 2024 financial well-being challenge, we are looking at how to assess your current financial situation. Understanding your assets and liabilities is a key part of that. Let’s look at these terms in more detail.
In order to calculate your net worth and assess the state of your financial health, you need to understand what assets and liabilities are and the importance of the interplay between the two.
What is an asset?
Assets are the items of economic value that you own. They can be categorised into two main types: financial assets, which have a monetary value, and non-financial assets, which have intrinsic value.
| Financial assets | Non-financial assets |
| Cash: Physical currency and money in bank accounts.
Investments: Stocks, bonds, mutual funds and other securities. Bank accounts: Savings and current accounts. Retirement savings: pensions |
Real estate: Land, buildings and homes
Vehicles Personal possessions: jewellery, art, collectibles, and other valuable items Business assets: equipment, inventory and intellectual property |
Ideally, your assets will appreciate in value over the long term, and this is your aim. However, it is not a given. Certain non-financial assets will depreciate as they age – vehicles are a good example. Financial assets can also lose value. Cash deposits will depreciate in real terms if inflation exceeds interest rates and of course, we all know that the value of investments can go down as well as up. Diversifying a portfolio is one way to mitigate against that.
Certain assets, such as stocks that pay dividends or buy-to-let properties, can generate income. If you’re lucky they will achieve capital growth at the same time.
You should keep a detailed record of all your financial assets by category. Crazy as it sounds, it is easy to lose track of these. The value of lost pensions in the UK alone is £26.6 billion.
What is a liability?
Liabilities are obligations or debts that you owe. They cost you money. These obligations represent claims on your resources, and they typically arise from past transactions or events. Liabilities are a key component in calculating net worth, as they are subtracted from assets to determine your overall financial position.
Your liabilities may include:
- Credit card debt
- Store card loans
- Student loans
- Mortgages
- Taxes owed
- Outstanding bills
- Overdrafts
Understanding and managing liabilities is crucial for financial planning and decision-making. High levels of debt can impact your ability to meet your financial obligations and affect your overall financial health, as well as your mental health. However, not all debt is bad.
Asset or liability?
Some levels of debt can be strategic if loans are used to invest in growth opportunities or acquire assets that will gain in value, adding to your net worth over the long term.
So while a mortgage is a liability, it is used to purchase a property and once the mortgage is paid off, the liability becomes an asset.
Investing in stocks is another example where what may initially seem like a financial liability can transform into a valuable asset. When you purchase stocks, it is an allocation of funds that could be seen as a liability on your financial statements. However, if those stocks appreciate in value over time, they become assets that contribute positively to your overall financial portfolio.
Prudent investment decisions and a long-term perspective can turn what was once a liability – the initial capital outlay – into a valuable asset that enhances your financial standing.
It’s the careful consideration and management of these financial instruments that determine whether they become a burden or a stepping stone toward greater financial stability.
How to build your asset portfolio
The primary goal when crafting a financial plan is to grow your assets while minimising liabilities. Formulating an effective plan involves a thorough examination of both your income sources and expenses and an action plan to get rid of any debts you have, minimise expenditure where possible and seek effective ways to systematically increase your assets.
This is where an Infinity financial adviser can add enormous value, by channelling your funds into investments that are aligned to your budget and goals. Their professional advice will guide you in the right direction, empowering you to make prudent decisions that are good for your financial wellbeing.
Financial wellbeing challenge: next steps
Write a detailed list of all your assets and liabilities.
Here’s a table format to help you. You can adapt it to your requirements:
| Assets | Value ($) | Liabilities | Value ($) |
| House | 700,000 | Mortgage | 340,000 |
| Car | 30,000 | Student loan | 25,000 |
| Pension fund | Credit card debt | 2,000 | |
| Etc | Etc | ||
| TOTAL | Total assets | TOTAL | Total liabilities |
| Net worth = Total assets – Total liabilities | |||
Create a financial file that will help you keep track of your assets and liabilities
Once you have a clear view of your current financial situation you can move on to step 2 of the challenge: defining your financial goals. We’ll be tackling that in February.
If you’d like advice on any aspects of the challenge, chat with your Infinity financial adviser. If you don’t have an adviser and would like an informal chat to find out about the benefits of working with a professional financial consultant, please get in touch
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