It is well-known that businesses use a number of tools to not only evaluate their financial standing in the industry, but to calculate the profitability of their current operations. One such tool is the balance sheet. The balance sheet shows a financial picture of the well-being or health of a business or of an individual at a given point in time.
Getting A Grip with Finances
As individuals, personal finances should undergo the same scrutiny the finances of a business do, so why not create a personal balance sheet that can be used in the same way, to calculate financial health and to determine personal net worth at any given point in time? Although drawing up an annual balance sheet is easier than creating a monthly statement, calculating individual net worth on a continuous basis will enable the systematic formulation of sound financial decisions.
An important aspect to take into consideration is that unlike other financial tools, the balance sheet’s role is only to show an organizations' or individuals financial net worth at that point in time and should not be considered a measure as to how finances will look in the future. It should be used as a guide to help establish a means to curb spending and steer earned income into profitable channels.
Steps to Financial Freedom
By creating a personal balance sheet on a monthly basis, it is easy to ascertain whether personal finances are in a good situation or in decline and will aid in establishing a time-frame to meet financial goals. In order to create a balance sheet, the following actions should be taken:
Action 1: Create a list of all personal assets and their value
The first step to creating a personal balance sheet is to create a list of personal assets and their worth. Assets are any item that can immediately be converted into cash, and as assets depreciate over time, it is important not to over-estimate their current value in proportion to their original price. Examples of assets to be included are:
- Any highly valued items such as antiquities and jewelry
- Cash, either in savings and checking accounts
- Life insurance policies
- Marketable and non marketable securities
- Personal loans
- Personal property
- Vehicles
Action 2: Make a list of all liabilities and their balances
The second step to creating a balance sheet is to list all personal liabilities and how much is owed on each one. Liabilities are any financial debts that are owed, and it’s important to make this list as complete as possible. These can include:
- Any outstanding and monthly bills (Credit cards, charge accounts, utilities)
- Debts
- Mortgages
- Taxes and interest still outstanding
- Unsecured and secured loans
Action 3: Calculating personal net worth
After the lists are complete, the calculation to determine personal net worth is as follows: simply subtract the monetary value of the liabilities from the total value of the assets:
Assets-Liabilities=Net Worth
The Road to Financial Health and Wealth
It is very important to be honest in determining the exact value of the assets owned and liabilities owed; the aim of calculating personal net worth and re-evaluating personal financial position is not to create panic, but to allow honest and open scrutiny into financial health and to help determine how much financial resources are available to fufil current needs and future goals.
It is important not to get discouraged during the process of collecting and documenting financial data needed for the balance sheet calculation; and although it may take longer than anticipated, the creation of a balance sheet is an easy task, made even easier by the provision of numerous templates and informative websites that offer already made net worth templates and calculators.
As Walter Updegrave said in an article published on the 6th July 2009 in CNNMoney.com entitled, ‘How does your net worth stack up?’, ‘...your net worth can give you an idea of just how much of a margin of safety you have against financial setbacks. That’s useful information in an iffy economy like this one when you’ve got to be particularly careful about deciding how much you can afford to spend...save...invest.’
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