NOW i KNOW !

Newsletter No. 01-2016

How much financially-worth are we?

100 million? Couple of billions? Sort
of trillions?
Try to find out how much financially worth we are. We might
find out that we are wealthier than we think, or maybe we are
not that wealthy as we used to think, or maybe that our
finance need some extra attention.
Net worth is a measure of ones wealthiness. Wealthiness
should go along with a healthiness in financials. Measuring
our wealthiness is one means to ensure financial health.
This current newsletter elaborates ideas to understand whats
your net worth, identify your state of financial healthiness,
and metrics to ensure financial healthiness.

Whats Your Net Worth?

Valuating your assets, debts, and eventually,
your net worth.

Net Worth Equals Wealth

Knowing your net worth is important as initial steps
to knowing how financially healthy you are. Your
net worth is the difference between your assets and
your liabilities (or debts). This figure is a measure
of your wealth as it represents what you own after
everything you owe has been paid off. For you to
know your net worth, you have to understand your
assets value as well as your debts.

Valuating Your Assets

Your asset is any property or thing you owned that
is regarded as having monetary value. Having
monetary value, an asset can be sold, it can be
used to pay debts, and it can even be passed-on to
your legacies. Your asset can be in a form of cash,
deposits, estate property, vehicle, investment,
jewelry, other belongings, and so on.
The first step in valuating your assets is to list them
down. Once your assets have been listed, you then
need to estimate a monetary value on each of your
asset. See the next table for an example of an
assets listing and their valuation. For the purpose
of discussion in this newsletter, lets pretend that
they are your assets.

Your Assets
as per date 31 December 2015
List of
Asset
Cash on Hand
Savings
Time Deposits
Gold Bars
Stocks
Mutual Funds
Employee Stock Option
Paintings & Collections
1st Car
2nd Car
1st Motorcycle
2nd Motorcycle
House
Land

Asset Value
(in Million Rp)
10
150
180
40
20
90
40
30
250
420
20
50
2,200
300

3,800
Total Assets, in million Rupiah

Looking at the table of your assets list, your asset

therefore is in total of 3.8 billion rupiah.

Note that your assets value is dynamic over the

time, thus mentioning an asset status date is just
as important. In this example, your asset is valued
at 3.8 billion rupiah as per date 31-December-2015.
When valuating your assets, you should estimate
the monetary value of your assets as if you are
selling them right now, immediately. It is not the
purchased price when you acquired the asset.
Some assets (like cars) loose value over time; and
other assets (like house and land) grow value over
period. It is advisable to value them conservatively,
again, assuming as if you are selling the asset
immediately in need for cash.

Counting Your Debts

Your Debts
as per date 31 December 2015
List of
Debts

Debt Value
(in Million Rp)

1st Car Loan

180

2nd Car Loan

300

1st Motorcycle Loan

10

2nd Motorcycle Loan

30

House Loan
Non-collateral Loan
Credit Card Loan

1,800
300
80

2,700
Total Debts, in million Rupiah

Once you know your asset value, next is to find out

how much debt you owe (if you have one). Debt is
simply the amount of money that you owe to other
party, such as typically to the bank. Assuming that
you have some debts, first you need to list down all
the debt items you have; and second, you need to
know how much outstanding or remaining debt you
owe of each debt item.

Now you know that you have a total debt of 2.7

billion rupiah.

Debts is also dynamic over the time that you need

to determine the date status of the debts. Your debt
in this example is on status as per 31-December2015. See the table above, an example of your
outstanding or remaining debt.

Your net worth is the difference between your

assets and your debts, that is your assets minus
your debts. When you do the calculation and you
find your net worth negative, it means you have
debts more than your asset, and most probably you
are financially in trouble. A negative net worth
indicates that all your assets are actually financed
from the debts, or it can be said that your assets
are owned by the creditors, or in other word you
are asset-less.

Earlier you have known your total assets, now you

can calculate how much your net worth is.

Whats Your Net Worth?

As a general principle, you must have assets more

than your debts. The greater the assets compared
to debts, the better. With that principle, you must
have assets enough to cover your debts.

Your Net Worth

as per date 31 December 2015
Assets

3,800

Debts

2,700

1,100
Net Worth, in million Rupiah

As per date of 31-December-2015, your net worth

is 1.1 billion rupiah. Your net worth in this example
is positive, and thats good. You have assets more
than your debts.

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Are you Financially Healthy?

Conclusion

Having a negative net worth is for sure showing an

unhealthy financial condition. A positive net worth
indicates a good financial condition. Taking you
further to knowing a positive net worth, you should
also understand how financially healthy you are
from the perspective of assets and debts.

There are two ways to increase your net worth:

(1) increase your assets; or (2) decrease your
debts. You can increase assets by increasing your
cash or increasing the value of assets you own.

The Debt-to-Asset Ratio is one measure to indicate

a financial health. You compare your debt over
your asset, that is dividing your debt value by your
asset value.
Debt

=%

Asset

In the example, your debt of 2.7 billion rupiah is

divided by your asset of 3.8 billion rupiah, and the
result is a ratio in a percentage value of 71%. What
does this ratio mean? What is considered a healthy
ratio?
A Debt-to-Asset Ratio of less than 50% is the ratio
value for a healthy finance. The ratio value between
your debt and your assets should be maximum at
50%, if you want to be considered having a healthy
financial condition.
The Debt-to-Asset Ratio of 71% in this example
indicates an unhealthy financial conditions. It
means that 71% of your assets is financed by
debts, or simply 71% of assets are not yours.

Increasing your net worth through an asset

increase will work if the increase in assets is
greater than the increase in debts. When you
increase your asset, make sure you dont increase
the debt along. For example, your assets will
increase if you buy a house, but if you take out a
mortgage on that house your debts will also
increase. The same goes for decreasing your
debts. The decrease in what you owe must be
greater than the reduction in assets.
To be financially healthy from the perspective of
assets and debts, you can set two targets to work
on finance:
First, ensure you have a positive net worth; and
Second, maintain a Debt-to-Asset ratio of less
than 50%, the lesser the better.
You meet the two financial measures on assets
and debts above, and you should be having a
healthy financial conditions.

By Iswin Hudiarto
The writer is Principal Financial Planner and
Director of Cikaldana Financial Advisory.

PT Cikaldana Korpora Sovereign Plaza 21st Floor, Jl. TB Simatupang Kav.36, Jakarta 12430
P: +62 21 2939 8727 F: +62 21 2939 8898 www.cikaldana.com E-mail: contact@cikaldana.com

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