“Surround yourself with assets.”
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How do they translate to personal finance for fathers?
We have put a three-line equality in the balance equation to indicate that it must always hold, by definition:
Assets = Liabilities + Shareholder Equity
By definition, this also means:
Shareholder Equity = Assets – Liabilities
Assets
The assets in the balance sheet are prioritized in list form by the estimated amount of time it would take to convert them into cash. The asset side depends on the nature of the business and how management chooses to conduct it. Using assets, management makes decisions about cash versus marketable securities, credit versus cash sales, whether to make or buy commodities, whether to lease or purchase items, and the types of businesses to acquire, for example. In your life and personal finances, you can use assets as leverage in expanding credit lines, reducing exposure, and improving long-term investment positions. Then, these could be cashed out or passed onto future generations, such as a home, a powerhouse stock, or even crypto currency.
Liabilities
The liabilities are listed in the order in which they would typically be paid over time. The liabilities and shareholders’ equity side reflects the types and proportions of financing, which depend on management’s choice of capital structure, as between debt and equity and between current debt and long-term debt. For you, as a father, liabilities can constrain or liberate your financial position. Not all liabilities are bad! On your personal financial budget, they’ll look like debts owed, perhaps a car loan. On the other hand, your home loan is a liability and a financial obligation for a borrower, yet these monthly future mortgage payments in your budget add up to better credit scores, improved home value and, ultimately, a liquid asset in your home.
Shareholder Equity
The shareholder equity is defined to be the difference between the assets and the liabilities of the firm. In principle, equity is what the shareholders would have remaining after the firm discharged its obligations. You are a shareholder in your life! Your equity is what you have left between assets and liabilities. Use net positive equity to empower yourself and plow reserves into a dream opportunity. That could be updating your kitchen or starting your own business, for example. Negative equity is no good, my friend. This might be best exemplified by the precipitous situation when the value of your property falls below the outstanding balance on your mortgage. That means you owe more on your home than it’s worth. This is “being under water.” Again, no good.
See more equations and ratios from Finance For Fathers here.
