What is an Asset?
An asset is something that has value and can be converted into cash. As mentioned earlier, some assets might only have an estimated value. For example:
- Real estate has an estimated price until you sell it.
- A used car has an estimated value until you take it to a dealer or another potential buyer.
On the other hand, some assets have a very exact price. Here are some common examples of assets and how they are best valued:
Examples of Assets and Their Valuation:
- Cash balances: The amounts in your chequing/savings accounts.
- Guaranteed Investment Certificates (GICs) or Time Deposits: These are effectively the same as cash except they are locked for a fixed period.
- Stocks/ETFs/Mutual Funds/Retirement funds (e.g., 401k or RRSP for Canadians): Your financial institution typically tracks your market value in real time.
- Real estate: You can get an appraiser to do a valuation, or your real estate agent can provide an estimate (though they may be biased). You can also research recent transactions in your city.
- Used cars: You can get reasonable estimates online or take the car to a dealer for a more exact number.
- Your stake in a small business: Valuing a business is complex. Accountants and bankers use methods like Book Value (similar to net worth) or arbitrary measures like 20 times annual earnings. When valuing your business, take the most conservative number, as finding a buyer can be challenging even for stable businesses.
Examples of Assets I Suggest Excluding from Net Worth Calculations:
- Intangibles like education or training: The amount you’ve already spent is a sunk cost. While education may help you get a job or make critical life decisions, you can’t easily attach a monetary value to it and you can’t resell it.
- High-value personal items like jewelry or art collections: These often have sentimental value and may not be intended for sale. They’re also not as liquid as stocks, making it hard to determine their worth. For example, a piece of art bought for $100,000 might sell for anywhere from $20,000 to $200,000, depending on the buyer. I’d exclude these from net worth calculations until sold, as their valuation is highly uncertain. If and when you sell them, the proceeds will become part of your cash balance.
- Low-value items like used kitchen appliances: Selling a blender for $50 on sites like Kijiji won’t significantly impact your net worth. While they have value, I wouldn’t include them.
I’m leaving things like life insurance and annuities out of the list because these fall more into retirement and estate planning. Technically, you could attach a financial value to these financial products if you choose to include them.
There are more exotic types of assets, such as derivatives and options. If you’re sophisticated enough to invest in these, you likely know how to value them better than I do. The above are the most common types of assets most people encounter.
I’m dedicating another article to discuss the liquidity of assets and why that’s important for emigration purposes.
What is a Liability?
A liability is something you’re obligated to pay.
Examples of Liabilities:
- Mortgages: Use the principal value on your mortgage statement for net worth calculations.
- Auto loans: Common in North America, where having a car is a necessity in most cities.
- Student loans
- Business loans with a personal guarantee
- Credit card debts
- Court judgments
Not all debts are equal. Your country may have specific laws about certain types of debts. For example:
- In the U.S., student loans are difficult to discharge.
- Some court judgments may be unenforceable if the debtor has no assets or goes through bankruptcy proceedings.
When it comes to loans, consider whether they are asset-backed or not. For example:
- A mortgage is backed by the home. If you fail to pay, the bank can take possession of your home and sell it.
- Business loans often require a personal guarantee, and the financial institution may place a lien on your personal assets. A lien gives the creditor first claim to the proceeds when the asset is sold. When selling a major asset like a house, lawyers typically handle the process and ensure liens are addressed.
If you have more liabilities than assets, your net worth is negative. Being in financial distress obviously makes it harder to emigrate.
Can I Emigrate to Escape My Debts?
It’s not my role to preach ethics. If you’ve already obtained residency or citizenship in another country, then yes, you could. It would be much harder for creditors to pursue you overseas. Furthermore, if you have no assets left, then your creditors can’t take anything even if they win a court order to seize your assets.
However, if your spending habits and poor financial acumen are the root cause of your debt, you’re likely to end up in the same situation no matter where you go. That’s why I always promote good financial literacy and habits.
Additionally, if you have a lot of debt, you probably don’t have much cash. Without sufficient cash, it can be hard to sustain yourself upon arrival, and you might not meet the financial requirements set by the country’s immigration department. For example, you may find it hard to secure a lease agreement as many landlords will require proof of income. If you fail to provide proof of income, they could ask for a whole year’s rent upfront. So if you are knee deep in debt, it is unlikely that you have the means to emigrate unless you’ve already obtained residency of another country.