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The task at hand entails making a list of all your possessions and debts. Personal assets and investment assets are the two primary categories into which the assets fall. Personal assets like your house and its contents, your company property, vehicles, ornaments, etc. are possessions that you are not permitted to sell or liquidate in order to obtain money for your financial objectives.
Some of these personal assets may see an increase in value over time (such as a house) or even a decrease (such as a vehicle).
You can sell or liquidate investment assets, such as stocks, bonds, funds, bank deposits, real estate, and properties, if necessary to raise money to achieve your financial objectives.
When purchasing investment assets, the goal is to profit from their value growth so that they can be sold or liquidated at a profit as and when needed. For a better understanding of the type and nature of the investment assets, investment assets are further sub-classified into Debt, Equity, Gold, Real Estate, and Alternative (Art, Antiques, Collectables, etc.).
By computing ratios like the liquidity ratio, asset to debt ratio, and others, this activity also has the secondary goal of evaluating your financial situation. Your liquid assets' worth is compared to your monthly costs using the liquidity ratio. It indicates your capacity to cover your monthly obligations in the event of a dire financial situation (such as job loss, disability, etc.). Assets that can be quickly sold to raise cash are referred to as liquid assets. You might not be able to sell your real estate assets with ease, but you might readily withdraw cash from your bank account or redeem shares and mutual fund shares. As a result, your investments in mutual funds, stocks, and bank accounts can all be regarded as liquid assets.
The ratio between your entire assets and your total outstanding obligations is called your asset to debt ratio. The only way to have a positive net worth is if the value of your assets is higher than the value of your outstanding loans. Corrective actions may be needed to boost liquidity to prevent being cash-strapped, as well as for reducing debt & raising assets, if the ratios are not favorable, i.e. if you have less liquid assets (cash and cash equivalent investments) or larger liabilities than the assets you hold.
It would be a good idea to keep reserve funds equivalent to at least three months' worth of expenses on hand if you are a salaried individual. This fund is referred to as the Contingency Fund. These reserve funds can be kept in mutual funds that are liquid or invested in money markets, where they can be quickly accessed as needed. The purpose of the contingency fund is to cover a family's living costs in the event of an emergency, such as a disability or job loss where the primary source of income may be temporarily interrupted. The amount of contingency reserves needed should be determined by looking at your monthly budget to determine your non-discretionary costs, such as food and groceries, bills and taxes, education costs, health care, loan installments, etc.
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