Finance Friday PART II: Personal Balance Sheet
/By Margaret Leddy
Last week I mentioned a Personal Balance Sheet and this week I wanted to expand the topic and help you come up with a successful balance sheet for yourself.
You can download your own personal balance sheet here!
Any business or company's financial statements always include a balance sheet. The balance sheet is considered a snapshot at a point in time of a company that includes company assets and liabilities. The balance sheet reports what a company owns and what a company owes, giving a potential investor the current financial position of the company. A personal balance sheet will not only give you a picture of your financial position, but it will act as a useful tool in measuring your progress toward your financial goals, maintaining information about your financial activities, and provide helpful data that can be used when preparing tax forms or applying for credit or loans.
Once you complete your balance sheet, you can calculate your net worth. Determining your net worth will provide an indication as to how you might prioritize your financial goals. I mentioned in the previous article that there are personal finance apps such as Mint that have a feature which assists in setting up a personal balance sheet. I have included an excel spreadsheet that I like to use, which is based on the balance sheet found in Kapoor, Dlabay, Hughes, and Hart’s 12th edition of Personal Finance.
Step 1 in the process of setting up your balance sheet is determining the value (or estimated value) of your assets/possessions.
Your assets include liquid assets such as cash, and items that can be quickly turned into cash (liquidated). For example, money in a checking and savings account, cash value of insurance, cash in your wallet or under your mattress are all included in your liquid assets.
> Next, list any real estate that you own. The value is the current market value of the home, condo, etc.
> Next, determine the value of your personal possessions (don’t forget your instrument!). Include the market value of your car if you own one. Kelly Blue Book is a great resource for looking up the value of cars: https://www.kbb.com/whats-my-car-worth/?ico=kbbvalue. Also included are electronics such as your laptop, headphones, mobile phone, etc., as well as, jewelry, furniture, and the like. You can value your personal possessions at the purchase cost, but a more accurate method might be to have them appraised, or to check online to see what the items are currently selling for.
> Finally, if you have a retirement account or investments accounts, include those. The sum of your liquid assets, real estate, personal possessions, and investments will be your total assets.
Step 2 is to list all liabilities starting with current liabilities and then adding in long-term liabilities. Current liabilities include: bills, credit card balances, auto loans, etc. Long-term liabilities include: mortgages, student loans, and any other debts owed over a longer period of time. The sum of current liabilities and long-term liabilities is equal to your total liabilities.
Step 3, the final step, is to subtract your total liabilities from your total assets. This will give you your net worth!
This information can be a valuable reference tool when determining financial goals. For instance, if you have a negative net worth, you may want to prioritize paying off your debts before investing money. The process of creating a balance sheet may take some time but, once it is set up, it will be easy to make adjustments each month, quarter, or year, depending on how often you choose to update it. The goal will be to increase your net worth over time.
Having detailed information can help you to decide where to make changes in order to increase net worth. Increase any of your assets (consider investing in a mutual fund to grow your assets that much faster!), or decrease any of your debts (tackle the high interest rate debts first!) and voilà! Good luck and happy saving!
References
Investopedia Staff. “Reading The Balance Sheet.” Investopedia. 20 May 2018. Web. 14 Aug 2018. https://www.investopedia.com/articles/04/031004.asp
Xu, Hannah. “Why you NEED to have a personal balance sheet to become rich.” LinkedIn. 15 Nov 2014. Web. 14 Aug 2018. https://www.linkedin.com/pulse/20141115083211-213321273-why-you-need-to-have-a-personal-balance-sheet-to-become-rich/
Dlabay, Les R., Melissa M. Hart, Robert J. Hughes, and Jack R. Kapoor. Personal Finance. 12th ed., McGraw-Hill Education, 2017.