Total assets

Savings do not stay as savings. Over the years they turn into things: a flat, gold, shares, a mutual fund folio, a provident fund balance.

The current value of all of that is the individual's total assets. It sits on one side of the personal balance sheet.

Everything is counted at estimated market value, not at what it cost. A flat bought for Rs 30 lakh that is worth Rs 80 lakh today counts as Rs 80 lakh.

The workbook then says something blunt about the number. Individuals tend to look at total assets, but it is net worth that is more relevant.

The reason is simple. A large asset figure proves nothing if the assets were bought with loans that are still outstanding.

There is also a conservative habit worth knowing. When you are working out what is actually available for goals, leave out the home you live in, personal jewellery and the car. You are not going to sell the roof over your head to fund a holiday.

The definition (section 3.9.2). Savings of the individual are deployed over time in various forms of physical and financial assets — the workbook's list is shares, debentures, mutual funds, real estate, gold, provident fund, superannuation fund, and others. The current value of these assets constitutes the investor's total assets. It adds that physical assets such as real estate are typically acquired with a combination of savings and loans, which is why the liabilities side has to be read alongside.

The valuation basis. Section 15.9 spells it out for the net worth computation: the house, the car, investments in stocks, bonds and mutual funds, the balance in savings accounts, the value of jewels owned and the value of all other financial and real assets are to be recorded at estimated market value. Not cost, not the circle rate, not the insured value.

The conservative exclusion. A conservative approach would be to exclude personal jewellery, one residential house that the investor's family stays in, and any other form of asset meant for personal use (for example a car) while estimating the assets available to meet goals and financial needs. Note the qualifier — the exclusion is for goal funding, not for the balance sheet itself.

What the figure feeds. Total assets is the denominator or the starting point for 3 of the personal finance ratios:

The workbook's own worked figure (section 3.9.4). An investor owns real estate worth Rs 50 lakh, investments and bank balances of Rs 10 lakh, and Rs 5 lakh in a provident fund account. Total assets = 50 + 10 + 5 = Rs 65 lakh. Against total liabilities of Rs 13 lakh (Rs 10 lakh outstanding home loan, Rs 2 lakh credit card dues, Rs 1 lakh borrowed from a friend), the leverage ratio is 13 ÷ 65 = 20% and net worth is Rs 52 lakh.

How often. Net worth — and therefore the asset total behind it — is to be calculated periodically, at least once in a year, and the progress tracked.

The workbook's personal balance sheet for Lakshmi (section 3.6) lays the assets out in full:

Against that, her liabilities are a housing loan of Rs 12,02,000 and credit card dues of Rs 5,000 — Rs 12,07,000 in all. So her net worth is 36,22,000 − 12,07,000 = Rs 24,15,000.

The workbook's own reading of her position: the net worth figure is relatively low because most of the assets have been acquired through loans and a large part of those are still outstanding. Her leverage ratio is 12,07,000 ÷ 36,22,000 = 33.3%.

Now apply the conservative exclusion, to see what is actually available for goals.

That is 41% of her headline asset figure. She looks like a Rs 36 lakh household and has Rs 14.85 lakh to aim at her goals with.

And the workbook's own priority: the investment figure is still a bit less than the value of the house, she is not much into growth assets like equity and equity-oriented mutual funds, and the amount lying in the bank is not very high. Rs 45,000 of cash against a Rs 12 lakh loan is thin. Which is exactly the kind of conclusion a headline total assets number hides and the balance sheet exposes.

Chapter 3 (Cash Flow Management and Budgeting), section 3.9.2, with total liabilities at 3.9.3, the leverage ratio at 3.9.4, net worth at 3.9.5 and the solvency ratio at 3.9.6; the personal balance sheet illustration is at section 3.6 and Chapter 15's section 15.9 repeats the market-value rule. Expect an arithmetic question that hands you a list of holdings and loans and asks for total assets, net worth or the leverage ratio, and a conceptual one asking which assets a conservative approach excludes when estimating what is available for goals.

• Market value, not cost. Every asset is recorded at estimated market value. Using the purchase price is the commonest computation error.
• Total assets is not net worth. The workbook says individuals tend to look at total assets but it is net worth that is more relevant, because assets bought on loans prove nothing.
• The conservative exclusion applies to goal funding, not to the balance sheet. Personal jewellery, the one house the family lives in and personal-use assets such as a car come out when you estimate assets available to meet goals — they still appear as assets.
• One residential house, not all of them. A second flat held as an investment stays in.
• Provident fund and superannuation balances are assets. Candidates leave them out because they cannot be touched today.
• A leverage ratio above 1 means assets will not be adequate to meet liabilities. It is Total Liabilities ÷ Total Assets, so higher is worse; the solvency ratio is Net Worth ÷ Total Assets, so higher is better. The two point in opposite directions.
• Compute it at least once a year. The workbook wants the trend, not a single snapshot.