Managing our wealth can sometimes be very difficult if a person lacks financial planning and financial management skills. He may end up spending a lot of money and this may result in unnecessary debts that lead to high interest payments. Every person should make sure that his cash flow is proper and well controlled. When we analyze corporates or large-sized companies, we look at their balance sheet to determine their financial strength. A strong balance sheet means having a large amount of cash and a lot of assets along with liabilities in strict control. In the same way, preparing a personal balance sheet can help you to be aware of your financial position and help you set realistic goals for the future. You will be able to know how you use a balance sheet by consulting an expert financial planner.
Structure of a Balance Sheet
As in the case of a company balance sheet, your personal balance sheet will also have two columns - assets and liabilities. Assets are the things you own or which increase your total worth and on the other hand liabilities are the amounts which you owe to outside agencies. For being financially secure, you need to have strong assets and very few liabilities. So, prepare two columns of assets and liabilities when you start with your balance sheet preparation.
Cash in hand and cash in bank would be the first particular on the assets side of the sheet. Money in the savings and checking accounts will also be in the assets side. If you own any machinery or products, then they too will be included in the assets side. Their valuation needs to be done by considering their current value and not the one for which you have bought them. Properties - residential or commercial, would also be your assets. An automobile would also be an asset for you. The assets side will also contain all your investments such as 401(k), company stock plans, mutual fund investments, shares of companies held by you, your investment in gold and other metals. Any other investment apart from the above mentioned would also be included in the assets side. The total of all the individual assets will give you the total assets in monetary terms.
As said above, the next column will be that of your liabilities. In this column, you need to list down all your dues one after the other. The liabilities will be classified as current liabilities and long-term liabilities. The current balances which are unpaid will be included in the current liabilities whereas long-term debts, auto loans and mortgage loans will be in the liabilities side. The total of all the liabilities will give you the total liabilities. Balance sheet analysis will help you know the technique of understanding financial matters.
For a sound financial position, the liabilities should be quite less as compared to the assets. To calculate your net worth, you need to subtract the total liabilities from the total assets. The formula for net worth has been given below.
Net worth = total assets - total liabilities.
Hopefully, this explanation of the personal balance sheet and how to calculate your net worth will help you to achieve your financial goals effectively. So, start with the calculations and think of ways to improve your balance sheet. All the best!
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