A personal balance sheet provides a snapshot of one’s assets and liabilities thereby reflecting upon the individual’s net worth. Creating one can be a useful starting point in the entire process of financial planning for life ahead.
Creating your personal balance sheet can be a useful starting point in the entire process of financial planning for life ahead. The balance sheet is a statement indicating the financial position of an individual on a specified date. In other words, it provides a snapshot of a person’s assets and liabilities thereby reflecting upon the individual’s net worth.
The personal balance sheet should be prepared at least once a year, though a quarterly or six-monthly review of financial position would be desirable. The list of assets owned is placed on one side of the balance sheet while the liabilities are listed on the other side. As a statement, the balance sheet should always balance. That is, the total assets should be equal to the sum total of all liabilities and the net worth. The performance of the Balance sheet is given below for your reference.
|Liabilities||Amount (Rs)||Assets||Amount (Rs)|
Credit card balance
Cash in hand
Cash at bank
Certificate of deposits
|Long term liabilities|
Real estate mortgage
(Assets – Liabilities)
House on lease
Assets are the resources one owns. An asset may have been acquired using one’s own funds or maybe financed using debt. Assets are generally grouped into different categories on a balance sheet such as liquid assets, investments, property, and other assets. All these assets are periodically reviewed to update their current fair market value on the balance sheet. Liquid assets are low-risk financial assets such as cash or assets that can be readily converted into cash. These assets are generally required to meet the day to day expenses and provide for unexpected events. Long term investments, on the other hand, provide the potential of generating positive returns for the individual over time. The intention of holding such assets is to generate profits in the long run, which complement the fulfillment of long term life goals. Immovable properties such as a house or office premises are of a high value and have a long life. The value of such assets appreciates with time. Personal properties, movable in nature, may exist in the form of furnishings, vehicles, jewelry, electronic equipment, clothing, etc. Such assets depreciate in value over time.
Liabilities, on the other hand, indicates the debt owed by a person or a family. It can be in the form of personal loans, credit card charges, loans against property, overdraft facility etc. The liabilities that are due for payment within a year are called short term liabilities while long term liabilities refer to an amount due for payment after a year. Short-term liabilities are also known as Current Liabilities. These generally arise from one’s expenditure on consumable goods and services, bill payments, rent, insurance premium, medical expenses, and other days today’s monthly expenses. Other forms of current liability relate to credit card amounts outstanding to be paid at a near-future date. Long-term liabilities may take the form of real estate mortgages, personal loans, educational loans, loans is taken for buying stocks, etc. While in the case of real estate mortgage, loans are associated with the purchase of real assets such as a house or an office space, etc.; consumer loan is generally taken to finance the purchase of personal assets such as automobiles, appliances, furniture, etc.
When one deducts the total liabilities from the total assets, the balance left if any represents an individual’s net worth. In other words, net worth is the amount available with the family after selling all the owned assets at their current fair market value and paying off all outstanding liabilities. In case the liabilities exceed the fair market value of assets, it technically means that the individual is insolvent and has done no proper financial planning.
The net worth of an individual is expected to improve as he/she moves from one phase of the life cycle to another. A student usually has a very low or sometimes even zero net worth. This is because the assets that the student has are usually minuscule while the liabilities may include educational loans, utility bills, etc. As the student graduates to become an employed individual, he/she starts to own more liquid assets than before and may even hold assets such as a car, house, etc. With further advancements in career and proper long-term financial planning in place, the wealth creation process starts to grow exponentially and the individual is able to realize multiple life goals. This is when the net worth of the individual becomes more than sufficient enough to attain financial freedom in life.
As per Kaizen’s principle, small improvements on a daily basis lead to much bigger accomplishments over time. Although it is often applied to business processes, it equally holds true for every area of our life.
You must gain control over your finances or else they shall forever control you !