ALM is Asset Liability Management. What does that mean exactly? ALM is the process of managing your risks that happen when your assets and liabilities differ. Taking the proper steps to manage these two things is vital to your financial future.
You should think of ALM as risk management. You want to increase your profitability while lowering your risk factors. Maximize your assets and grow your net worth. Your net worth is the difference between your present value of liabilities and your market value of assets. It’s best to think of your ALM as a long term plan and it should be approached strategically instead of tactically.
Examples of Liabilities
The most common example of a liability is a mortgage. Every month you need to have a sufficient amount of assets to make your mortgage payment. Basically, a liability is any contractual obligation to deliver cash, usually on a monthly basis. These can be things such as a loan from an entity or accounts payable.
Financial means money and liability means you are responsible (fiscally) if something goes wrong.
An asset is any tangible or liquid asset you may have that has value. Tangible assets are things such as real estate or commodities being traded on an open market. They have a financial value that is finite and typically come in some kind of physical form. Other examples might be something like equipment or a company’s inventory.
A liquid asset is something that you can quickly and easily trade for money, or it can simply be the cash in your hand. Other than straight cash think of a checking account or your savings account. Government bonds, stocks, tax refunds, marketable securities, and CODs are some other examples of liquid assets.
Management is controlling or directing something or someone. When it comes to finances management is extremely important. Whether you’re a business or not, this process is something you need to take seriously. Below is a great way to manage your assets and liabilities.
Gather Pertinent Information
Information about things such as bank statements and loan balances. Items to take into account are cash, the value of your home and car. Other items might include personal property and any investments you may have. Those are your assets. Now you want to check your liabilities. These are things like credit card balances, or how much you owe on your home mortgage. Other things to look at are any loans be it car, student, or personal.
Once you have added and subtracted all of your assets and all of your liabilities, you’ll know your net worth. When you are aware of your net worth you are able to make better financial decisions. It empowers you to know when to spend and when not to spend. It also lets you know where your money needs to go; how much needs to be saved and what it needs to be saved for.
Taking these simple steps and being diligent with ALM can help shape your financial future