Net Worth Terminology
Assets: the value of everything you own, including any cash or bank
deposits, material goods, and investments.
Categories of Assets
(1) Liquid Assets:
These include cash accounts (i.e., your chequing and savings accounts),
T-bills, money market funds -- any money you can get at quickly and
without penalty. This is money available in case of emergency, and also
in case of investment opportunities.
(2) Semi-Liquid Assets:
These include longer-term investments such as stocks, bonds, mutual
funds, RRSPs, or real estate. These investments are intended to provide
for major future needs such as purchasing a house or retirement.
(3) Non-Liquid Assets:
These include material goods such as your house, car, computer, and
other personal property. These items are intended for your long-term
personal use, and are not easily converted to cash.

Liabilitites: any debt you need to pay.
Types of Liabilities
(1) Short-Term Debts:
These are debts that must be paid within the next 12 months. These include
credit card debts, consumer loans, and smaller personal debts.
(2) Long-Term Debts:
These are used for two purposes:
• to pay for investments such as real estate, including your home
• to pay for major purchases such as a summer cottage, motor home, or car

Net Worth: the difference between your assets and your liabilities.
Net Worth = Assets - Liabilities
Equity is the same as net worth. Note that equity and 'total assets' are
not the same.

The Debt/Equity Ratio
Shows how your debts compare with your net worth. A debt/equity ratio
of 0.40 would indicate that the value of all the debts is 40% of one's net
worth. A person's or family's debt/equity ratio should not exceed 50%.
The debt mentioned above includes all short-term and long-term debts
except the mortgage on your home. Therefore, the formula for the debt/
equity ratio is:

How to Increase Net Worth
The following three strategies to raise one's net worth are often recommended
by financial planners.
(1) Save more on a regular basis.
(2) Reduce your debt.
(3) Get a higher rate of return on your investments.

Net Worth Problem
Mona would like to do some extensive house renovations, but she decided to
calculate her net worth and debt/equity ratio before applying for a loan. The
following information was used in her calculations.
• Her house is valued at $93,000, and she still has a $62,000 mortgage against
the house.
• She has $4600 in a bank savings account, and she has invested $21 500 in
mutual funds.
• Her car is valued at $16,000, and she still has a two-year loan for $9600
against it.
• She has a life insurance policy with a cash surrender value (near cash) of
$5300.
• She has RRSPs worth $9450, and owns Canada Savings Bonds valued at
$1800.
• Her credit card debt is $2554, and she has a $3015 consumer loan (for
furniture) payable in the next six months.

• Her house is valued at $93,000, and she still has a $62,000 mortgage against
the house.
• She has $4600 in a bank savings account, and she has invested $21 500 in
mutual funds.
• Her car is valued at $16,000, and she still has a two-year loan for $9600
against it.
• She has a life insurance policy with a cash surrender value (near cash) of
$5300.
• She has RRSPs worth $9450, and owns Canada Savings Bonds valued at
$1800.
• Her credit card debt is $2554, and she has a $3015 consumer loan (for
furniture) payable in the next six months.
(a) Create a Net Worth Statement for Mona.
(b) What is Mona’s net Worth?
(c) What is Mona’s Debt/Equity Ratio?
(d) How would these change if Mona made a bank loan for the
renovations of $15,000?
(e) Should Mona apply for the loan? If not, can you suggest another way
she can finance her planned home renovations?

"How Much Can I Afford to Pay for a Home?"

Calculating the maximum mortgage you can afford ...