Personal Balance Sheet

A personal balance sheet is one of the most important tools you will use in managing your finances, and the bottom line: your net worth, is one way to gain some insight into your overall financial health.

What is a personal balance sheet?

Don’t even think of worrying about accounting rules here. This isn’t a professional accounting class, and you’re not reporting your balance sheet to the SEC or shareholders. You aren’t going to get in trouble for doing it wrong. The only rules I really suggest you stick to are:

  1. Be honest with yourself.
  2. Be consistent.

Don’t change the scope of your balance sheet without good reason. If you choose not to include the value of your comic collection as an asset, don’t decide to add it in next month because something else has taken a turn for the worse. You’re not kidding anyone but yourself, and aren’t getting the real value from the personal balance sheet: seeing whether your net worth is moving in the right direction.

What are my assets?

Things you own of value are assets. It is useful to distinguish between current assets and long-term assets.

Current assets

Current assets are those with high liquidity, i.e. those which you can convert to cash in hand at a moment’s notice, or expect to receive within a short period of time (you choose — let’s say a month).

Examples include cash, checking and (instant access) savings account balances, and that $50 you loaned to your room-mate (called an “account receivable”). Make a list of all of these, and their current balances.

Long-term assets

A long-term asset is one which you couldn’t use for beer money next weekend. They’re things which you plan to (or have to) keep for a long time.

Examples include certificates of deposit, retirement accounts (your 401(k), IRA, etc.), your home and your car. Make a list of all of these, and their current balances.

For some long-term assets where you don’t have an accurate value, either:

The most important thing to remember in valuing your assets for your personal balance sheet is rule #2: be consistent.

What are my liabilities?

Things you owe are liabilities. For our purposes, it’s really as simple as that. You can also split these into current and long-term categories if you wish. I don’t bother.

Examples of liabilities include credit cards, personal loans, bills and debts due for payment (“accounts payable”). Perhaps a student loan which you know you’ll have to repay when you leave college could be a “long-term liability”. It doesn’t really matter what you call it. Make a list of all of these, and their current balances.

What is my net worth?

Net worth = total assetstotal liabilities

That’s pretty much all you need to know for now. Now, write it all down, calculate total assets and liabilities, subtract liabilities from assets, and you’re done!

I’ve provided an example of a very simple personal balance sheet below. I recommend using Google Docs to set up a spreadsheet of your own — unlike Microsoft Excel spreadsheets stored on your hard drive, you can access your Google Docs from anywhere with an internet connection, and you really won’t need to use any of the advanced features of a desktop spreadsheet program for your personal balance sheet. Whatever you’re most comfortable with is fine. A pencil and notebook will work just as well.

Assets
Current Assets
Checking Account $500
Savings Account $1,000
Total Current Assets $1,500
Long-Term Assets
Certificate of Deposit $750
401(k) $1,250
Total Long-Term Assets $2,000
Total Assets $3,500
Liabilities
Current Liabilities
Credit Card $2,000
Total Current Liabilities
$2,000
Long-Term Liabilities
Student loan (not entered repayment) $2,000
Total Long-Term Liabilities
$2,000
Total Liabilities
$4,000
Net Worth ($500)

In this example, we owe (liabilities) more than we own (assets), so our net worth is negative. Don’t panic if the same applies to you. Even if you didn’t know it until now, that might why you’re here.

Now we’ve completed our personal balance sheet, we’re half way through establishing our baseline, and half way through answering the first question: “where am I starting?“.

Some other good reading on personal balance sheets and net worth:

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2 Responses to Personal Balance Sheet

  1. Pingback: Question 1: Where am I starting? | Answer Four Questions

  2. Pingback: Cash Flow Statement | Answer Four Questions

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