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 one’s 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 what’s

your net worth, identify your state of financial healthiness,

and metrics to ensure financial healthiness.

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, let’s pretend that

they are your assets.

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What’s Your Net Worth?Valuating your assets, debts, and eventually, your net worth.

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List of

Asset

Asset Value

(in Million Rp)

Cash on Hand 10

Savings 150

Time Deposits 180

Gold Bars 40

Stocks 20

Mutual Funds 90

Employee Stock Option 40

Paintings & Collections 30

1st Car 250

2nd Car 420

1st Motorcycle 20

2nd Motorcycle 50

House 2,200

Land 300

Your Assetsas per date 31 December 2015

3,800Total 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

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.

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-December-

2015. See the table above, an example of your

outstanding or remaining debt.

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Now you know that you have a total debt of 2.7

billion rupiah.

Earlier you have known your total assets, now you

can calculate how much your net worth is.

What’s Your Net Worth?

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.

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.

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

is 1.1 billion rupiah. Your net worth in this example

is positive, and that’s good. You have assets more

than your debts.

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 1,800

Non-collateral Loan 300

Credit Card Loan 80

Your Debtsas per date 31 December 2015

2,700Total Debts, in million Rupiah

Assets 3,800

Debts 2,700

Your Net Worthas per date 31 December 2015

1,100Net Worth, in million Rupiah

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Are you Financially Healthy?

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.

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.

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.

Conclusion

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.

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 don’t 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.

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

By Iswin Hudiarto

The writer is Principal Financial Planner and

Director of Cikaldana Financial Advisory.

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