To manage your money successfully, you need a standard by which you can measure your economic progress.
One gauge of your financial headway is your personal balance sheet; it will allow you to see your assets and liabilities, and where your money is going.
You can then take steps to make your net worth grow by finding ways to control spending, reduce debt, and increase savings and investments.
To prepare your personal balance sheet you will need a block of uninterrupted time, pen and paper, or your personal computer. Once you have an initial estimate, you can go into a more in-depth analysis, if you wish. Here’s what to do:
- List your assets (everything you own that can be sold or swapped for another item of value). Include your house, car, household goods, jewelry, bank accounts, stocks and other investments; vested holdings in company savings and pension plans; Individual Retirement Accounts (IRAs); and cash-value life insurance.
- List the market value next to each asset.
- Total your assets.
- Separately, list your liabilities. Record all debts, including credit card and charge accounts, mortgage, home equity line of credit and other loans, such as automobiles or colleges.
- Note the principal amount due next to each liability. Do not include interest.
- Total your liabilities and subtract them from your assets.
The result of these calculations is your net worth. If assets exceed liabilities, you have a positive net worth. If liabilities exceed assets, your net worth is negative.
You now have a foundation for working toward making your bottom line grow.
Your balance sheet can help you determine whether your finances are in line with your goals.
Depending on your objectives, you may want to pay down old debts or postpone new ones, initiate a savings plan, go on a stricter budget, or begin a more aggressive investment policy.
Recalculate your net worth annually, and you’ll be able to assess your progress and work toward improving your money management. Your financial record keeping will benefit, too. IBI