Unit 3, Lesson 5

personal balance sheet

helps to determine your financial position at a specific point in time; it summarizes assets & liabilities & determines net worth; it enables you to evaluate & analyze your current financial condition

liquid assets

include cash or something that can be easily converted to cash without a significant loss of value, like money in a savings account or a checking account

real estate

includes houses, rental properties, farms, & land

Knowing your net worth can

influence financial decisions you will need to make, such as making new purchases, acquiring new investments, or applying for a loan

household assets

items owned by a household, like cars, furniture, & TVs

What are three categories of assets?

liquid assets, household assets, & investments

assets

valuable possessions and monetary items that people own; something you have or something that's owned

How can you calculate the current value of stocks, bonds, mutual funds, and other such investments?

use the market value

Determining the Value for Antiques & Furniture

Appraisal value is an unbiased opinion of a qualified appraiser based on knowledge, experience, & analysis of an item being sold; this is the best method for determining the value of household assets such as antiques & furniture

Formula for Net Worth

Asset Value - Liability Value

Determining the Value for Cars & Vehicles

Fair value, also called fair price, is a rational & unbiased estimate of worth based on the potential market price after considering all factors that can affect price; sources of fair value can be found by searching the Internet or consulting a book like Kelly Blue book, which is often used to estimate the value of vehicles; although fair value can provide an estimate of value, it is typically not the most accurate determination of value; appraisal is most accurate

Credit Card Liability

If you don't pay the balance (not just the minimum amount due) each month on a credit card bill, you could turn the credit card into a long-term liability Each month that you don't pay the balance, the credit card company adds interest to the balance, making it harder to pay off

Upside Down on a Loan

If you're upside down on a loan, it means you owe more money on a loan than it's worth If this ever happens, financial advisors recommend holding on to the item until the loan is paid off; if you sell the item instead, trying to get back some of the money, then you'll still owe money to the lender for nothing

Debt-to-Asset Ratio

Lenders will often use a debt-t-asset ratio to get an idea of your net worth; in cases like these, net worth is used to help determine if you have enough wealth to make the payments needed to repay the loan; to find the debt-to-asset ratio, divide your total current liability (debt) by your total assets For example, suppose you owe a total of $7,400 and the assets you own total $19,225; the debt-to-asset ratio is 7,400/19,225, or about 38.5%; this means that 38.5% of your assets are accounted for, or used up, in your current debt An excessive amount of debt will result in a high debt-to-asset ratio; therefore, a lower percent is considered better; this is because, compared to how much you have in assets, you don't owe very much money

Determining the Value for Houses

Market value is the price a seller can expect to receive from a buyer if the item were sold today; house value is typically determined based on market value; similar houses that have been sold recently in the area are used to estimate the value of a house being sold

mutual funds

a mixture of stocks, bonds, & other investment plans that spread out the risk over multiple investors; many retirement plans are a form of mutual fund

Once you know how much each asset & liability is worth,

a personal budget sheet can be used to determine your total net worth

amortization table

a table that outlines how much is still owed on a loan after any given payment period

stocks

certificates that represent partial ownership of a business & are purchased in amounts of shares; their value can increase or decrease at any time; as a result, one can gain or lose money before the stock is sold

What are two types of liabilities?

current liabilities & long-term liabilities

current liabilities

debts that will be paid off in one year or less; credit cards, if used properly, act like a short-term loan & should be paid off each month to avoid paying interest

long-term liabilities

debts that will take longer than one year to pay off; some examples include student loans, car loans, & home mortgages

How can the value of liabilities, such as loans & mortgages, be determined?

look at the payoff amount, which can be requested from the lender at any time; payoff amounts are typically valid for a 2-week period; in addition to asking the lender for the payoff amount, you can also look at an amortization table

liability

money that someone owes; a debt that is owed, like a loan or a mortgage

bonds

notes you can buy where a government or business promises to pay a certain amount back to you after a specified length of time

net worth

one way to measure a person's overall financial state

investment

something that's bought with the idea that it will increase in value over time, such as stocks, bonds, mutual funds, & real estate

A car will be considered an asset but any payments due on the car will

still count as a liability

equity on an item

the amount that you have paid back to the lender (after subtracting it from the actual value); you can think of equity as the part of the item you fully own

The value of liquid assets, such as money in a bank account, can best be determined by

the bank statement