Net assets is just a fancy way of saying what is your overall balance once you’ve taken account of all your assets (e.g. shares and savings) and all your liabilities (i.e. debts)
The equation for net assets is ‘Total assets minus total liabilities’
Let’s look at a simple example. Adam has the following financial portfolio:
Assets:
– 30,000 Savings
– 50,000 Shares
Total: 80,000 assets
Liabilities
– 1,000 credit cards
– 4,000 loans
– 95,000 Mortgage
Total: 100,000 debts
Adams net assets would therefore be 80,000 minus 100,000 which equals -20,000.
It is clear, therefore, that to grow his net assets, he would either have to:
1) Grow his assets by putting more money into savings and/or shares
2) Reduce his debts by overpaying on his credit card, loan, and mortgage balances.
or he could choose to do a bit of both.
The choice of which approach to adopt will often be influenced by the respective interest rates. Let’s imagine that the rates were as follows:
5% Savings
6% Shares (this might have to be an assumed return)
18% credit card
8% loan
6% mortgage
Looking at these accounts, the logical thing to do would be to pay off the credit card, or switch to a zero percent credit card! Generally, interest rates on credit cards, loans, and mortgages will be higher than the rates available from savings accounts, so it makes sense to pay off the debts as quickly as you can.
For example, every 100 on the credit card would generate 18 of debtor interest, whereas every 100 in the savings account would just generate 5 of creditor interest.
However, remember to keep some savings in reserve as you never know when you may need them.
And, you may wish to continue to buy shares alongside a strategy of paying off your debt as the long term combination of capital growth and dividend payments may deliver a very worthwhile return.