Evaluating your financial health – personal balance sheet

Are you trying to find a way to save enough money to meet your financial objectives but aren’t sure exactly how to proceed? Saving might seem to be an easy task but in reality if it is not planned for it is not as easy as you imagine because it does not come naturally. If you haven’t already done so, we advise that you first take a look at our post on how to develop a personal financial plan. Recall that the execution of the plan is just as important as the actual plan development so be prepared to make sacrifices. At first it might not seem easy but with time you will get used to it and it will become easier. In the following post we will explain how to execute the first step of the development of a personal financial plan (for the other steps click here).

 Step 1: Evaluate your financial health

Before defining the goals of your financial plan, you must first understand your spending pattern. When it comes to evaluating your financial health, you need to calculate your net worth and determine exactly how much you are earning and what you are spending your money on. To help you with this task you will have to develop two things: a personal balance sheet and a personal income statement.

Personal Balance Sheet

A personal balance sheet will help you determine your personal net worth. In a nutshell, a personal balance sheet is a snapshot of your financial position at a given point in time. Such statement is comprised by what you own, known as assets, and what you owe, known as liabilities or debt. By subtracting the sum of the liabilities from the sum of the value of the assets you own, you come up with your net worth. Your personal net worth represents the level of your financial wealth. The greater the net worth, the better your financial position.

How to develop a personal balance sheet

Start by listing all the assets you own (all your possession, including those where you still owe money on). Depending on the nature of the asset, they will fall in one of the below categories:

  • Monetary assets (cash, bank account, CDs)
  • Investments (stocks, mutual funds, ETFs, bonds, etc)
  • Retirement plan
  • House (market value)
  • Car (market value)
  • Personal property (resale value of items such as jewelry, furniture, collectibles)
  • Other assets

For each asset that you add to the list, make sure to assign a monetary value. Be sure to indicate the fair market value and not what you paid for the asset. For example, if you purchased a car for $20k do not indicate this value in the asset list. You should indicate the fair market value of the car at the time you have put the personal balance sheet together. All values should be current. As such, at a given point in time, the fair market value of an asset may be less or more of what you originally paid for the asset. Once you have put together the list and the fair market value for each item, calculate the total value of your asset by taking the sum of all the listed items.

Now you can do the same with your liabilities. Group all your liabilities in a single list. The most common categories for liabilities are:

Current debt (debt that must be paid off within next year)

  • Utility bills
  • Credit card balance
  • Rent
  • Cable TV bills

Long-term debt (beyond 1 year)

  • Home mortgage
  • Car loan
  • Student loan
  • Other personal loans

The value of each liability that you add to the list must be that of the unpaid balance. As such, as you pay your debt, the total sum of your liabilities will decrease.

Calculating your personal net worth

Now that you have calculated the total value of you assets and the total value of your liabilities you can calculate your personal net worth.

Personal net worth = Total assets – Total liabilities

You can increase your net worth by decreasing your liabilities, by increasing your assets, or even better, by doing both at the same time.

Recall that a personal balance sheet is a snapshot of your financial condition at a specific point in time. As such, make sure to update your balance sheet on a regular basis. Updating it two-three times per year is good enough.

If your net worth turns out to be negative don’t be discouraged. The whole purpose of this exercise is to understand where you stand financially in order to be able to realistically save enough money to meet your financial goals (step two of the personal financial plan).

Now that you have put together your first personal balance sheet we can move on to creating your first personal income statement. If you haven’t already done so, sign up to our newsletter to always be informed on our latest articles. Stay tuned!

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