Have you ever wondered, “if I were for sale how much I would be worth?” or “How much would someone pay for me?” The answer to these questions is fairly simple. However, takes a little calculation and thinking. Most people want to instantly say, “I am worth $50,000 because that is my salary.” Unfortunately, that is not your net worth and in fact, you are probably much more valuable than your salary. However, if you follow the trend of the average American, you’ll be worth much less. In other words, if I were to stand on the street today completely naked, getting rid of absolutely everything I have owned and clear all my liabilities (amounts owed to others), would I have cash sitting at my feet (meaning there is a positive net worth), or would I still owe money to someone or for something (meaning there is a negative net worth).
A balance sheet, also called a net worth statement or statement of financial position, reports what you own and what you owe. You prepare a personal balance sheet to determine your current financial position using the following process:
Items of value (what you own)
– Amounts owed (what you owe)
= Net worth (your wealth)
I have laid out a few simple steps to help you begin your balance sheet and if you subscribe and follow me today you will receive the Budget Workbook that contains a balance sheet, which I have personally created to help you!
Step 1: List items of value.
To start, prepare a total of all items of value (assets). Include amounts in bank accounts, investments, and the cost (or estimated current value) of your possessions.
- Liquid assets: items you can quickly convert to cash, or cash itself. An example might be a CD (Certificate Deposit).
- Real estate: The value of your home.
- Personal possessions: Items inside of your home or vehicles.
- Investment assets
Step 2: List and total the amounts owed to others (liabilities).
All things considered this list will include current debts, charge account/ credit car balances, and amounts you owe on loans and mortgages.
- Current liabilities: Current, meaning 6 months or less of what you owe to companies or people.
- Long-term liabilities
IMPORTANT: The biggest thing to understand about the debts or expenses on a balance sheet that represent your net worth is the following:
- Say you live in a house and use AT&T for your Internet and phone provider. The debt that you would owe to AT&T is the amount that you would be fined for canceling your subscription early. Not your monthly bill.
- In the situation of the home, you would represent the asset of the house at fair market value. However, on the liability side you would represent the number for the value of the loan that you still owe on the home as of today’s date.
Step 3: Lastly, Subtract total liabilities from total assets to determine net worth. This amount indicates the current financial position of an individual or household.
Evaluate Your Financial Position
A personal balance sheet helps you to measure progress toward financial goals. It will improve more rapidly if you are able to set aside money each month for savings and investments. As will the opposite happen if you begin to accrue more liabilities. In conclusion, take the step today and begin your balance sheet process to find out how much you are worth and to help accomplish your financial goals!