INCREASING NET WORTH

Understanding some accounting principles will be beneficial in making sound financial decisions. One does not need to be an accountant to make good financial decisions, but understanding the way that financial statements work will help in analyzing the current financial condition of an individual or business. It is essential in making economic calculations. Running a household is no different conceptually than running a business. Both have inflows and outflows. The key to success is to ensure that the outflows do not exceed the inflows. This is the role of good record keeping.

Financial statements capture historical data. They show if a household or a business has been successful in managing their resources. To sustain viability, the household or business should be seeking to increase its equity position. This equity position or net worth is calculated by taking the assets minus the liabilities. This leaves a residual known as net worth or equity. This residual shows how much ownership of the assets a household or business has.

Net worth or equity has to do with ownership. This ownership position should be increasing on a monthly basis. The only way that this can take place is to have a stream of income and then control spending, so that income exceeds expenses. This will, by definition, leave a surplus. This is the way to the accumulation of wealth. This also demonstrates successful financial management.

Financial management includes the production process i.e. the gaining of income. This whole process has to be properly managed and controlled to have success. When someone does not know where their money goes, they are headed for disaster. Keeping accurate financial records can never be stressed enough. All income and expenses must be accounted for. There is no way to know what one owns without objective proof.

When making a large purchase such as a home, most people do not have the resources available to purchase it outright, so they make monthly payments. With every months payment on a mortgage, the purchasers equity will be increasing that is, their ownership of that home. The same is true of any other asset. The net worth increases when liabilities or debts decrease. The result of increasing net worth is ownership and ownership means that one has been financially successful.

Increasing net worth is the same thing as increasing wealth. Wealth is objectively proved by the things that you own. We need material products to take care of our physical needs. Wealth, thus sustains our physical life. However, this is understood spiritually. Net worth is conceptual in that it has to do with the ownership of life sustaining objects. An increasing net worth is essential in being able to meet future needs.