In our last post in this series, we discussed broadly the balance sheet, which in the sum of all its parts, defines your worth. Remember, everyone has a balance sheet, even though most of us never take the time to actually define our total worth on paper. 
To define and actually manage our worth, we must define and manage our budget (see previous posts below), as well as a cash flow statement (see our future posts). What we want to do in this post is to begin to look at each part of the balance sheet, beginning with assets–delaying until later posts, a more detailed discussion of liabilities and owner’s equity.
Assets are what you have, but not necessarily what you own. Looking at what other people have may convince you that it is their’s, but this is not (and, in America, seldom is) always the case. One can acquire things by either exchanging surplus cash (i.e. savings) that derives from spending less than you make over time, or one can borrow against future income, and use that promise to pay at a defined future date, to get what you want/need today. When you exchange excess cash for something you want, one is really just exchanging one asset for another. It is important to note that assets, like cash, or those easily convertible to cash and thus liquid, are usually seen as short term assets–while those that are more difficult to convert to cash, thus illiquid in nature, such as real estate, fine art and other complex investments, are usually seen as long term or fixed assets. So, you can see it is not just what you have, but how you acquired what you have AND how easily is it to convert what you have into cash, that determines the value of said asset and thus, with the total of all one’s assets, your net worth.
If you have a lot, but acquired what you have by borrowing, leveraging your good name–i.e. credit score–or existing assets as collateral, thus bringing forward tomorrow’s income with a promise to pay with interest in the future, you may actually have a lot, but you may own very little. What you have in this case is debt. So, even though friends, family and the average Joe on the street may think you are wealthy, you may be, in reality, quite poor. On the other hand, if you use savings to convert a short term, liquid asset into a less liquid and thus, longer term asset of greater value, you may actually, if the value of the asset retains its value over time, have greater wealth, even though you may actually have less. Therefore, it is very important at an early age to learn how to determine the value of our needs vs. wants, and equally important, how to acquire those assets, using both leverage and savings (i.e. excess cash) in a balanced way over a long period of time.
Finally, what you have collected over time will usually be worth less in the future than it is today. The goal is to acquire those assets that hold their value or appreciate in value, while we have them, so, if and when, we choose to dispose of them, they will improve, or at least not decrease, our net worth. If we deploy our hard-earned income (and for some, income is harder earned than for others) in acquiring things that depreciate quickly, or actually degrade our net worth (which can be in body, speech or mind), then our net worth (and self-worth) will be negatively impacted over the long term. So, as you can see, having things just to fulfill a craving (many, tragically, habitual in nature, and often taught to us by others), of which the benefit is quickly depleted–though allowing us to project an illusion of self-worth to our friends, family and the man on the street–seldom provide lasting value, and usually leave us, in the end, more poor, than if we had not acquired them in the first place. For most of us the most valuable asset we have is hidden deep down inside of us and can not be bought and sold for any price. So, remember when becoming jealous of what others seem to have that things are not always what they seem.
Stay tuned for our next post in the prudent planning series that further defines the liability component of the balance sheet.
Happy Holidays to all, and remember not to eat too much, because too much of a good thing could turn out to be not so good after all.
Here are past installments in the ongoing Prudent Fiscal Planning Series:
Part 1: Prudent Fiscal Planning is Essential in Todays Economical Turbulent World
Part 2: Prudent Fiscal Planning: Incomes Importance in Fiscal Planning and Its Effect on Our Standard of Living
Part 3: Prudent Fiscal Planning: You Can’t Always Get What You Want
Part 4: Prudent Fiscal Planning: To Save or Not to Save that is the Question
Part 5: Prudent Fiscal Planning: What I Am Worth
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Picture Source: Unknown from the internet
