Sunday, October 14, 2012

How To Prepare A Personal Balance Sheet (Networth Statement)

A Personal balance sheet, also called a net worth statement or statement of financial position, reports what you or reports what you or your family owns and owes. This statement provides a summary of assets and liabilities that one has at a particular time. So, whenever you want to find the state of your finances, this statement will give you an answer. It will tell you whether you are doing good or bad.

This is how you go about preparing a personal balance sheet:

Step 1: List What You Own (Assets)
Do you have anything of value? List it here. Cash (at hand and in the bank) combined with other items of value are the foundation of your current financial position. Assets can be grouped into four:
  • Liquid assets
These are cash and items of value that can easily be converted to cash. Money in current and savings accounts is liquid and available for current spending. Surrender value of some insurance products such as endowment assurance policies can be borrowed if needed.
  • Real Estate
Includes a home, rental buildings, or a piece of land that a person or family owns. The current value (also referred to as market value) of these properties needs to be determined by qualified Property Valuers or Appraisers.
  • Investment assets
These include investments such as stocks, unit trusts, bonds, treasury bills, and any business you own. Since investment assets usually fluctuate in value, the amounts listed should reflect their value at the time the balance sheet is prepared.
  • Personal possessions
Motor vehicles and other personal belongings such as furniture, home appliances are in this category. While these items have value, they may be difficult to convert to cash. They can be listed in the balance sheet at their original cost. However, their values need to be revised over time, since a three year old car, for example, is worth less now than when it was new. Some other personal items might increase in value such as rare jewelry thus you may wish to list such items at their current value.
Step 2: Determine Amounts Owed (Liabilities)
Liabilities are amounts owed to others but do not include items not yet due, such as next month’s rent. Liability is a debt you owe now, not something you may owe in the future. Liabilities fall into two categories:

  • Current liabilities
These debts must be paid within a short time, usually less than a year and includes items such as utility bills, medical bills, insurance premiums, school fees arrears, cash loans and credit card payments.

  • Long-term liabilities
These debts are usually paid in full until a year later. Common long-term liabilities include auto-loans, educational loans, and mortgage.

Step 3: Calculate Net Worth
A net worth is the difference between total assets and total liabilities and it provides a measurement of your current financial position. Net worth is the amount you would have if all assets were sold for the listed values and all debts were paid in full.
Two things you should know about Net worth:
1.     If the total value of assets is larger than the total value of liabilities, you will have a positive net worth. However, your net worth is not money available for use but an indication of your financial position on a given date.
You can increase your net worth by:
§  Increasing your savings.
§  Reducing your spending.
§  Increasing the value of investments and other possessions.
§  Reducing amounts you owe by paying off your debts.
Please do understand that you may have a positive net worth and still have financial difficulties. Having many assets with low liquidity means you do not having the cash available to pay current expenses.
2.     If the total value of liabilities is larger than the total value of assets, you will have negative net worth which means you are unable to pay your debts when they are due.
I believe you can now prepare your personal balance sheet. Most personal finance management software’s (e.g. has an integrated net worth function. Make it fun to discover how much you are worth. If you find you are positive, great, focus to increase your net worth. If you find out you are under water, do not despair. Set a goal to get out of debt and improve your financial health.

Our next post will look at setting goals.

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