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Learn the Language | Budget and Save | Save and Invest | Take Control of Debt | Protect Your Wealth
You want to have plenty of money, right? So does Jack. He looked at his reality checking account and realized that at the rate he was going, there wouldn't be enough money to save for the things he wanted to buy.
So, he chose a money-saving strategy.
Jack began by learning the language of wealth creation. The first lesson was to understand the meaning of assets, liabilities, and net worth. They make up this very important formula:
ASSETS - LIABILITIES = NET WORTH
A wealth-creating asset is a possession that generally increases in value and provides a return,
such as:
- a savings account
- a retirement plan
- stocks and bonds
- a house
Some possessions (like your bike, car, video games, flat-screen TV, cell phone)
are assets, but they aren’t wealth-creating assets because they don’t earn money or rise in value. A new car drops in value the second it’s driven off the lot. Your car is a tool that takes you to work, but it’s not a wealth-creating asset.
A liability, also called debt, is money you owe, such as:
- a home mortgage
- credit card balances
- a car loan
- hospital and other medical bills
- student loans
Net worth is the difference between your assets (what you own) and your liabilities (what you owe). Your net worth is your wealth.
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Source: Federal Reserve Bank of Dallas Building Wealth, 2006. Reprinted with permission. |
