Taking control of your financial future is a process. And, as with any process, it is important to monitor your progress. One of the best ways for you to measure financial progress is to periodically prepare a personal balance sheet to determine your net worth.
Calculating your personal net worth
is also the best way to know exactly what your starting point is as you begin to develop a financial
plan and set goals for yourself. A balance sheet calculates your net worth by comparing your
financial assets (what you own) with your financial liabilities (what you owe).
The difference between the two is your personal net worth. Don’t be discouraged
if your net worth is negative, keep in mind that this should be an accurate
depiction of your financial situation. Setting goals is much easier once you
know what your current net worth is.
Before you get started, pull
together all of the information that you have available. You’ll need your
latest bank statements, as well as the principal balance of any loans you have.
Once you have all of that information available, start developing your balance
sheet by listing all of your assets (financial and tangible assets) with the
values.
- Cash (in the bank, money market accounts, or CDs)
- All investments (mutual funds, college savings accounts, individual securities)
- Home value (the resale value of your home)
- Automobile value (the resale value of your car)
- Personal Property Value (resale value of jewelry, household items, etc)
- Other assets
The sum of all of those values is
the total value of your assets. Your goal should be to continually increase
your assets.
Next, you can look at your
liabilities, which should be everything you owe. Here are some common liability
categories:
- Remaining mortgage balance
- Car loans
- Student loans
- Any other personal loans
- Credit card balances
The sum of all of the money you owe
is your liabilities. As you start to pay down your debt, your total liabilities
will decrease. The difference between your assets and your
liabilities is your net worth. You can start to increase your net worth by
decreasing your liabilities, increasing your assets, or by doing both! For many people developing a debt reduction plan is the best place to begin taking control of their personal finances and growing their net worth. Remember, a dollar saved is a dollar earned, and reducing debt and interest payments can eventually lead to financial freedom. Make
sure you continuously update your personal balance sheet (I recommend quarterly) to
ensure that you are tracking the progress toward reaching your financial goals.