Money & Finance

How & Why You Should Create a Personal Balance Sheet

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You’ve probably heard of companies using a balance sheet, but it may have never crossed your mind to use one for yourself. What is a personal balance sheet? A personal balance sheet, also known as a personal financial statement, is a momentary snapshot of all of your assets and liabilities. It shows you what you owe (liabilities) and what you own (assets). And better yet, not only does it help you by putting all of that pertinent information in one handy spot, it can help you see patterns, problems, and opportunities. 

Net worth

Your personal balance sheet will also help you calculate your net worth. What’s net worth? Your net worth equals your assets minus your liabilities. Or in more common lingo, it’s what you own minus what you owe.

Why should you care about your net worth? Your net worth serves as a benchmark for your overall financial health. It’s a single number, making it easy to track and to determine whether you’re making progress towards your goals. Your net worth is also a helpful indicator to lenders. Along with a few other metrics like your credit score and debt to income ratio, lenders will take a look at your net worth to determine if you are a trustworthy and responsible borrower.

Why should you create a personal balance sheet?

A personal balance sheet helps you track progress towards your financial goals. It puts all of the important information about your overall financial health in one place making it easier to spot patterns, problems, and opportunities. Cue one of our favorite phrases here at The Ambitious Dollar – if you can measure it, you can manage it

How do you create a personal balance sheet?

As we just described, a personal balance sheet consists of your assets and liabilities. So to create a personal balance sheet, you need to first list out everything that you own and everything that you owe. Below is a guide to what qualifies as an asset or liability and some of the common items and each category.

1. List out your assets and liabilities

What are assets?

Assets are things of value that you own – both financial and non-financial. These increase your net worth.

Common assets
  • Home value
  • Land 
  • Cash
  • Savings accounts
  • Checking accounts
  • Investments
  • Retirement accounts
  • Valuable possessions (like art, jewelry, collectibles, etc)

What are liabilities?

Liabilities are things that you owe and therefore they decrease your net worth.

Common liabilities
  • Mortgage
  • Loans
  • Credit card debt
  • Student loan debt
  • Auto loans

2. Compile your data

Once you have your list of assets and liabilities, you’ll want to pull it all together using the most recent balances possible. You can do this by combing through loan statements, bank statements, and accounts. Be patient, this can take some time if it isn’t a part of your normal routine. But think of it as a personal finance check up. It’s worth spending an hour or so to make sure you get it right. After all, the best decisions require accurate information. 

3. Categorize and organize your data

This step requires you to further organize your lists of assets and liabilities. While this may seem like extra work, it will allow you to reference and update things in the future much more easily. Moreover, it will make those patterns, problems, and opportunities we mentioned earlier even easier to spot. 

Asset classes

A common way to further organize your assets is by qualifying each as either liquid or non-liquid. What does liquid mean and why should you care about it? Liquid assets include cash and anything that can quickly be converted into cash without losing value. All of your liquid assets essentially add up to the amount of funds you’d have at your disposal in a moment’s notice. 

A good rule of thumb is that liquid assets can typically be converted into cash within 24 hours. If it takes longer than 24 hours to convert an asset into cash, then that asset is likely a fixed asset. Common liquid assets include things like: 

  • Cash
  • Savings accounts
  • Checking accounts
  • Stocks and bonds

Fixed assets, on the other hand, include things that either cannot be quickly converted into cash, or by doing so would lose value. Common fixed assets include things like:

  • Your home
  • Investment properties
  • Non-Roth retirement accounts

Categorizing your liabilities

Liabilities follow a slightly different logic for categorization purposes. In most cases, it makes sense to organize your liabilities according to time: short, medium, and long-term. Generally speaking, a short term liability would come due within one year. A medium term liability would come due within 5 years. And a long term liability would exceed 5 years. Here are a few examples:

Short term liabilities

  • Credit card
  • Rent 

Medium term liabilities

  • Auto loans

Long term liabilities

  • Mortgage
  • Student loan

It’s certainly not a requirement for you to organize your assets as liquid vs fixed, or organize your liabilities according to timeline. You’ll want to organize things in a way that makes sense to you. After all, you’re the one using it. And if it isn’t intuitive, all of this hard work will be for naught. 

If you need some inspiration, check out the example guide below for how you could set up your niched down asset and liability categories.

ASSETSLIABILITIES
LiquidShort term
Checking account $4,000Credit card 1$700
Savings account$6,000Credit card 2$400
Money market account$40,000Utilities$500
Total liquid assets$50,000Total short term$1,600
Non-liquid assetsMedium term
401(k)$75,000Auto loan$6,000
Kid’s 529 plan$5,000Total medium term$6,000
Home$300,000
Car$20,000Long term
Total non-liquid assets$400,000Mortgage$200,000
Total long term$200,000
Total assets$450,000Total liabilities$207,600
Net Worth$242,400
Liquid Net Worth$42,400

4. Calculate your net worth

Recall that net worth equals your assets minus your liabilities. If you have your personal balance sheet setup and categorized, it will be a simple calculation. Using the example above, your net worth would be:

$450,000 (total assets) – $207,600 (total liabilities) = $242,400 (net worth)

Liquid net worth

Your liquid net worth, on the other hand, sums up the amount of money you have at your disposal after covering your immediate liabilities. Whether you may need money quickly for an emergency, loss of a job, or unforeseen opportunity, your liquid net worth is what you’ll have immediately available to you. Liquid net worth is calculated by subtracting liabilities from your liquid assets. Using the example above, your liquid net worth would be:

$50,000 (total liquid assets) – $7,600 (short and medium term liabilities) = $42,400 (liquid net worth)

A note of caution

If those numbers make you feel uneasy or you aren’t happy with where they are, take a quick breath. Both net worth and liquid net worth are important numbers to know when assessing your financial health and tracking progress towards your goals. However, they aren’t something to fixate on. 

Your net worth, liquid net worth, and personal balance sheet are snapshots of where you are – not where you want to go. But they can help you develop a plan of how to best get you there. Whether your goal is to pay down debt, increase your investments, diversify your portfolio, or any combination thereof, using your net worth and personal balance sheet as benchmarks will help you make progress. 

How often should a personal balance sheet be updated?

As you might have guessed, the hard work is setting up your personal balance sheet in the first place. It’s recommended that you update your personal balance sheet at least once every 6 months. It’s also recommended to revisit your balance sheet after any bigger life or financial events, i.e. losing a job, changing jobs, buying a house, etc. 

Alternative options to a personal balance sheet

If manually keeping track of and updating your personal balance sheet seems like something you won’t stick with, luckily you have another option. There are some great apps out there that allow you to connect your various financial accounts so you can easily track your net worth. 

One of our favorites here at The Ambitious Dollar is Personal Capital. Personal Capital has a free app that provides simple, easy to manipulate visuals and data so you can see all of your assets and liabilities all in one spot. You won’t have as much organizational control as you would with a manual personal balance sheet, but it will get you a majority of the way there. But what you lose in organizational control, you gain ten-fold in the automatic update feature. You won’t have to manually update any of your balances since all your accounts will be connected directly in the app. 

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