Friday, April 4, 2014

Monitoring Assets, Liabilities and Networth

One of the key aspects of financial success is financial discipline. Financial discipline is about doing things like investing, paying off debts on time, monitoring bank accounts to check for expected dividends, unexpected charged levied, etc. regularly.
Another aspect of financial success is to monitor some key numbers. These are Assets, Liabilities and Networth.

Assets are explained more over here.
Liabilities include loans of all types (home, auto, personal, credit card dues, loan from family and friends, festival advance, etc.) and any amount you owe anyone.

Networth is what you are actually worth after removing your liabilities from the assets.
Networth = Assets - Liabilities

Monitoring these key figures is important for these reasons:
1. If your finances are proper, you should see your Networth increase over time.
2. You know how much you are worth financially or how much is your family financially secure for future needs.
3. You can also monitor asset allocation and do the necessary diversification based on the needs and your risk profile.

Here is an example of how you can monitor asset allocation and monitor the key figures over time.
I. Sample Current asset portfolio:
NSCs          1,00,000
PPF                  5,00,000
Bonds          5,00,000
Fixed Deposits 4,00,000
MFs                  5,30,000
Stocks          1,20,000
Cash             2,50,000
Assets        24,00,000 
The above can be well representated as below in the pie chart:

II. Sample Liabilities:
Festival advance   10,000 
Vehicle Loan     3,00,000 
Liabilities     3,10,000 

Networth = Assets - Liabilities = 20,90,000

To monitor how these vary over time, it is important to take a snapshot of the above figures regularly (say every month end).

You can also look at the trend of your networth along with assets and liabilities:
This is all more of a one-time effort to put the tables and graphs. Then, it is easy tracking your finances and see your wealth grow (hopefully) over time.

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