Simplified Personal Balance Sheet
Whether you want to buy a house, start a business, pay off debt, or simply improve your finances, you should prepare a personal balance sheet. But, what is a personal balance sheet?
A personal balance sheet is a simple statement that gives you a snap picture of your net worth by showing you the difference between what you owe versus your own. Thus, it also helps you find out how close or how far you are from achieving your financial goals.
Imagine, for instance, looking at your bank account balance on your phone; that’s a quick snapshot of your cash balance. It does not matter what you spent this month but how much money you have now. What things could you afford with that cash?
A balance sheet is similar, except that it will give you an overview of all your assets and liabilities. That gives you a full picture of where you stand financially, vs. just looking at how much cash you have in the bank.
By definition, a balance sheet is comprised of the following three things:
Assets (things you own that can be converted to cash, if needed)
Liabilities (money that you have to pay)
Equity (what’s truly yours – the difference between assets minus liabilities)
According to Robert Kiyosaki, writer of the best seller book “Rich Dad Poor Dad,” assets are things that put money in your pocket, while liabilities take money from your pocket.
The point is, when you put together a listing of your assets and deduct your liabilities, you will find out your current financial position.
That’s what’s important. Doing this will help you make better financial decisions, strategically plan big purchases, get out of debt and improve your finances.
Simplified Personal Balance Sheet
A balance sheet is called that because you have to balance your assets against your liabilities, with the difference being your net worth.
Assets are mainly cash, money in bank accounts, retirement accounts, and investments, such as houses, bonds, shares, or retirement accounts. You can also include personal property if the personal property’s value can be converted to cash.
Examples of personal property that can be converted to cash include a car, jewelry, or other personal items of value.
Liabilities are money you owe that you must pay out, such as a credit card balance or amounts owed in a credit line, a mortgage, a loan, or any other amount that you need to pay.
Equity or Net Worth is what is truly yours. For example, if you have a car that currently has a value of $15,000, but you owe $12,000 as a loan you got when you bought the car, then your equity in the car is $3,000 instead of the full value of $15,000.
Equity is what is truly yours; that’s why it is also referred to as your net worth.
If the amount of your liabilities is higher than your assets, that’s a big warning sign because it means you owe more than what you own. If things keep heading in that direction, you could be on your way to bankruptcy.
For illustration, here is a simple example of what a balance sheet looks like.
You can even create a personalized balance sheet for the entire family, but it’s important to show who owns what and what is owned jointly; the same goes for liabilities.
It’s also a good idea to compare the balances to previous years so you can determine if you’re moving forward.
For illustration, here is an example of what a balance sheet for couples could look like. Note that assets and liabilities are split to what relates to each person and what is owned jointly.
It sounds simple, doesn’t it? Once you have gathered the required information and documents, you’re almost there.
How To Create A Personal Balance Sheet?
The process is simple; you can use our free personal balance sheet template or use a blank paper to create one from scratch, separating assets and liabilities in their own section to compare the total between the two.
The critical part is that you’ll need to gather all relevant financial documents such as your credit card statements, bank account statements, amounts you owe, etc.
Check Out: Free Personal Balance Sheet Template.
Most people who are starting out after college/university probably have a negative net worth. That’s normal, especially if they have student loans. But it’s not normal to have a negative net worth years after finishing school.
To create your personal balance sheet, download the above file and follow these simple steps:
Step 1: List out all your assets (things you own)
Enter all your assets (things you own); the most common assets are cash in the bank, saving accounts, your house (if you own one), stocks, bonds, and personal property that can be converted to cash such as a car, jewelry, or antiques.
- Cash balance in the bank (savings and checking accounts)
- Current value of your investments (mutual funds, retirement funds, bonds, and securities)
- Home value (the resale value of your home, if you own one)
- Personal property value (items you considered valuable that could re resold, such as jewelry, gold, etc.
Add them up so that you get the total amount of your assets. You want to make it a goal to continually increase your assets as long as liabilities don’t increase by a higher amount.
Step 2: List out your liabilities (money you owe)
In this step, enter all your liabilities (money you owe); liabilities are easier to determine than assets because you likely get a monthly statement from your lender or whoever you owe money to. Use those statements to list out the current balance of the money you owe, including the following:
- Student loans and other personal loans
- Credit card balances
- Car loans
- Amounts owed in a line of credit.
- Mortgage balance, etc.
Step 3: Calculate the difference between your total assets and your total liabilities
In this step, you have to calculate the difference between step 1 and step 2. If the amount is positive, congratulations, you’re moving in the right direction; if the amount is negative, you’ve got some work to do.
Why Should Everyone Prepare A Personal Balance Sheet?
Everyone should prepare a personal balance sheet at least once per year to track their financial progress. You will inevitably one day want to retire, or you will want to buy a home, get out of debt, or achieve your financial goals.
Preparing a personal balance sheet is that important first step that can propel you to the finish line. You will easily determine if you are moving in the right direction or whether you are losing financially.
Many financial planners like to refer to a balance sheet as a Statement of Financial Position because after you have prepared one, you’ll understand where you stand financially.
If you see the amount of net worth/equity decrease consistently, that’s a warning sign. Surprise expenses like medical bills, or home repairs, or holiday spending might be the reason. Still, if you consistently see liabilities exceed your assets’ total, you need to find ways to reverse that trend.
Assessing Your Financial Details
A great way of tracking and improving your finances is by using a Budgeting Binder Planner. Our Budgeting Binder comes packed with over 31 printable templates that will help you save money, invest your savings and get out of debt fast.
Budgeting Binder Planner
This 31+ page printable digital binder planner will help you take control of your finances, and set clear financial goals, so that you can get out of debt.
The Bottom Line
The purpose of a personal balance sheet is to provide a simple and quick overview of a person’s financial position at a point in time. When someone wonders how much money they have, the number is not measured only by what they own.
Why? Because liabilities should be included. The difference is net worth or “real worth.”
To prepare your personal balance sheet, you follow these three simple steps:
Gather our financial documents
List out your assets and liabilities
Assess your financial position
A Personal balance sheet is like a report card on your finances. So, you have to prepare that report card at least once a year so that you can determine if you’re meeting or failing to meet your financial goals.
You can improve your financial position by decreasing your liabilities, increasing your assets, or by doing both.
For more help in improving your finances, check out our Budget Planner Calculator.