When we work hard to earn more and spend less, we are not just doing it for our health. The idea of accumulating wealth is an important part of your finances, but it can feel elusive over time. When we do the right things financially, our net worth increases. My favorite way to track that is with a tool I call the personal balance sheet.
Treat Your Money Like a Business
As an investor, I look at the statements of many companies before I make a decision to invest. The personal balance sheet is a great tool to give the same sort of view to your own personal financial statements. This may involve some work to put together the first time, the project will give you long-term value.
For those of us who have not taken accounting, here is a quick rundown. Assets on the left, liabilities on the right, shareholder's equity below liabilities. Assets + Liabilities = Shareholders Equity. For us, equity is synonymous with net worth.
How to Build a Personal Balance Sheet
To build my balance sheet for this exercise, I used and old Net Worth IQ entry from March, 2009. I then made a few adjustments using Excel to get the format right. If you are new with tracking your net worth, I suggest using Personal Capital to get all of your accounts into one place, then Net Worth IQ to track your net worth over time. Both of those sites are 100% free. You can see my monthly net worth updates here.
After some manipulation, I came up with this Personal Balance Sheet:
Remember that the balance sheet is a snapshot in time. Every time you buy something, cash (asset) goes down or credit (liabilities) goes up. If you buy an asset, such as a car, home, or valuable personal property, your property asset goes up.
Understanding Your Balance Sheet
Assets as a positive number plus liabilities as a negative number give you your personal equity. At the bottom, your total assets should be in balance with the total of your liabilities and equity, hence the name “balance sheet.” I did some more editing using Excel to make it look more like a corporate statement.
Analyzing Your Balance Sheet
Looking at the balance sheet on a short term-long term basis, we can see our immediate liquidity. A common measure of immediate liquidity is the quick ratio, or current assets over current liabilities. My quick ratio (12,768/227) is 56.25. That means I can cover my current liabilities 56 times with my current assets. A quick ratio of 1.0 means you are living literally paycheck to paycheck. A quick ratio below 1.0 means you are dealing with immediate liquidity issues (can't make payments).
While the short-term assets category for companies is anything due within a year, I am using within one month as current as that is more appropriate for a person making regular bill payments. From big swings in income or big debt payments, you can undergo a big change in a month's time. That is why I like to track my statement every month.
How Do You Stack Up?
If you don't mind sharing (though I understand if you want privacy), how does your personal balance sheet look? Were you surprised by the results? Do you have any questions about making a personal balance sheet, or do you have any questions about how to make yours better? Please share in the comments.
Originally posted March 30, 2009. Updated April 15, 2013. Image by Finsec / flickr.