Opinion – Grain in Grain: Is your personal net worth negative? Know why to worry

Most people miscalculate their personal net worth (PL). The confusion lies in thinking that your PL is your asset. So, you believe that by having an apartment, a car and some savings, you have a positive equity.

You may wonder, but why is knowing my PL important?

Imagine that you were to invest in a company and saw that its equity is negative. How would you rate this company? What risk would you put on her? How would you rate your financial sustainability?

What you thought about a company that has negative PL can also be attributed to you if you are in the same situation.

Knowing your PL is important, as it helps you define the risk you can take on investments, your financial leverage and your long-term financial sustainability. Therefore, doing this survey and following the evolution is fundamental in financial planning.

But what defines net worth?

As accounting manuals dictate, equity is the difference between total assets and total liabilities.

Some even understand this concept, but make another mistake.

Another common mistake is to believe that your liabilities are just your financial debts. As most of the time financial debts are worth less than the assets they finance, individuals also fall into the trap of believing that they have a positive PL.

It is important to accurately survey your assets, whether tangible or intangible. As well as your total liabilities.

For example, one of the biggest liabilities that people have is social security liabilities. Often, the individual does not have relevant debts, but the social security liabilities are double their total assets, resulting in a high negative PL.

In addition to financial debts, total liabilities also comprise the present value of all your short, medium and long-term financial objectives.

Here are two tips to correct your negative PL.

The first step is to avoid his negative evolution. A practice that must be dispensed with in order not to increase your negative PL is to finance the acquisition of goods that have a rate of return lower than the financing rate.

How would you rate the manager of a company that borrows funds to acquire an asset that will produce a negative return or at least lower than the cost of debt?

This manager can be you, if you are buying your car for pleasure on a financed basis or if you have acquired a property and have not made sure that the return on this will be greater than the real estate loan rate.

The second tip is related to the reversal of negative PL.

As in a company, the only way to transform a negative PL into a positive one is through the generation of recurring profits and the appropriate investment of these profits.

Profit means you spend less than you earn and invest this difference in financial assets that will generate more profit in the future.

Be an exemplary financial manager of your net worth and you will have the security of achieving all your financial goals.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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