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By Goessl Leigh

Why it is important to have a personal balance sheet

Do you know what your net worth is? This phrase may make it sound like you’ll need to compute complicated financial calculations, but for the most part, it is fairly easy to do. Using a personal balance sheet provides you with the personal tools to control your finances and help you establish any financial goals you hope to achieve – and then reach them.

Ideally, everyone should make an effort to review their net worth on a routine basis so they know where they stand financially and determine how to avoid falling into top money mistakes that can often occur.

What is a personal balance sheet?

A personal balance sheet is a visual tool that can be used to help you understand your finances. Essentially, it’s a type of financial statement that takes a snapshot picture of a company’s financial position on any given day. Basically, it shows how financially strong or weak a company is at the time. In other words, if a company took all assets and paid all debts today, what would be left for the shareholders?

This type of tracking works very much the same way for you because it provides you with the opportunity to obtain a crystal-clear picture of your financial strength and shows what is left over for you to either invest, make a purchase or contribute to a nest egg to secure your future upon retirement.

How do you make a personal balance sheet?

Write down all the assets you have today at their current value. For example:

  • Cash
  • Checking and savings
  • Car, house or land
  • Investments

Next, write down any debt that you owe today. Those are considered your liabilities. For example:

  • Mortgage
  • Credit card bills
  • Electric, phone and personal loans

What you have left is your equity, which is what is left over for you.

Assets minus liabilities equals equity.

If you have more liabilities than assets, your equity is negative. If you have more assets than liabilities, your equity is positive. As you may have guessed, negative is bad and positive is generally good.

What do you do with this information?

Take the information on your balance sheet and learn from it. The advantage of having a personal balance sheet is to show your financial position, so you can change it if need be.

Say you crunch your numbers for your balance sheet, and your equity turns out to be negative. That means your debts are larger than your assets, and if all your debts were due in one day, you would not have enough assets to cover them. The good news is that you can change your balance sheet anytime. You can increase your assets or reduce your liabilities to get yourself in a better position.

On the other hand, if your equity is positive, you might think you are in a great financial position, and you may be because you do have all debts covered and you have money in the bank. If your equity is too high, your money is not working for you. You want to invest that excess equity into another asset to earn interest or invest in something that will go up in value, so your money will work for you.

Another advantage to having your balance sheet is that you have all your assets and liabilities sitting on one page, so you know where all of your money is and where it is going.

How often can you make a balance sheet?

Companies usually do a balance sheet twice a year, but you can do one whenever you want. Remember, it is your financial snapshot for one day, so anything you change in your portfolio on any day will change your balance sheet. For example, if you pay off a bill or get a second job, your bottom line and what is left over for you will be different.

How can you make your balance sheet more efficient?

The best way to increase your balance sheet efficiency is to use spreadsheet software, such as Excel, Google Sheets or other types of software. This makes it easier because you do not have to start from scratch whenever you want to take a look at your financial snapshot. A spreadsheet or other form of electronic tracking helps you avoid errors and makes for easy calculation.

To make your tracking more efficient, the following additional practices can help you achieve financial balance and effortlessly track your money situation at any given time.

  • Break down assets and liabilities as far down as you can, so it is easier to find where expenses can be scaled back, if necessary (e.g., don’t write “utility bills” or “credit card bills” in your liabilities column – list them individually).
  • Revisit your balance sheet at least once every month or two to update your assets and liabilities to ensure you are still on track to meet your financial goals.
  • Set reminders to “schedule” a regular time to make adjustments to avoid missing routine adjustments.
  • Fine-tune your balance sheet every time a major life change occurs, such as obtaining additional assets, landing a higher-paying job, or taking on additional debt.
  • Track any problematic debt very carefully to ensure you do not inadvertently hurt your overall net worth when you’re under the impression you’re growing it – it’s a good idea to get a firm grasp on what is considered good debt vs. bad debt.

The more efficient you are with your financial tracking, the less time you will need to spend on it, freeing up more time to allow you to focus more on ways to achieve your overall monetary goals.

Calculating a personal balance sheet is easy and gives you power over your own finances. Develop a personal balance sheet at least once every six months for you and your family so you can stay on track with your financial goals and make smart decisions with your money.

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