This article is part of our series about financial literacy. You can find the links to the other articles at the bottom of the article.
Simply put, a personal balance sheet is a document that keeps track of everything that you possess (assets) and every debt that you owe (liabilities). With this personal financial statement, you can easily calculate your total net worth and know your financial position.
In this post, we are going to show you how to create a personal balance sheet.
How to Create a Personal Balance Sheet in 6 Steps
Step 1: Make A List of Your Personal Assets, Financial Assets, And Fixed Assets
Assets can be categorized into different groups. Here are the different types of assets that you should include in your personal balance sheet:
Current Assets/ Immediate Assets
These are assets that can be easily converted into cash in a short span of time. Examples of immediate assets include savings accounts, certificates of deposit, and checking accounts.
As the name hints, retirement accounts are designed to provide you with a steady cash flow and a source of income once you retire. The tax rules may differ from one retirement account to the next retirement account.
Retirement accounts also have unique tax exemptions rules. Some of the most popular cash retirement accounts include Roth IRA, 401k, and 403b.
Apart from that, some companies may also offer employee stock ownership plans (ESOPs) as retirement benefit plans.
Children’s savings accounts help you save cash for your kids’ future. Most are tax-advantaged accounts that let you save money for education. Examples of such accounts include 529 plans, custodial accounts, and education IRA accounts.
Business assets are available in different forms; company stocks, private equity, retained earnings, and owner’s equity. Due to this, you have to value the business assets that you own.
Since the price of real estate fluctuates with time, you have to do real estate valuation to determine the total value of your house/estate in cash.
Determine the cash value of your cars.
These are assets that cannot be liquidated easily and have low liquidity. They are tangible equipment purchased to be used for a long period of time. Such assets are used in firms and businesses to generate some income.
Step 2: Make a List of Your Debts
To make a list of your liabilities, you have to know the interest rate of different loans and the monthly payments that have to be made. These are some of the debts and liabilities that you might owe:
Credit Card Debt
This is the amount of money that you may owe different credit card companies.
Back taxes are taxes that were not fully paid at the right time—it can be income tax that was not paid when due. Back taxes are subject to different interest rates and penalties.
Property loans such as mortgages, home equity line of credit (HELOC), and home equity loans are also categorized as liabilities.
As the name hints, a student loan is used to fund your education. Examples of such loans include federal student loans and private student loans.
Personal Bank Loans
You can contact various institutions or log into different accounts to check the debts that you owe to different institutions.
Step 3: Collect and Organize Your Personal Finance Information
Once you finish writing a list of all the assets and liabilities that you may have, look for the financial information that will guide you as you are creating a personal balance sheet.
Some of the financial statements that you may need include a personal cash flow statement and an income statement.
Download recent financial statements such as your income statement and net cash flow statements. Make a couple of phone calls to different organizations, so that they can give you your financial statements.
While this process might be time-consuming, it makes things easier for you.
Step 4: Calculate the Total Value of the Assets that You Own
Since you made a list of the assets that you have, calculating the total value of your assets will be quite easy.
Input your assets to a spreadsheet software like Excel or Google Sheets. Group the assets in categories just as you had done earlier on. Input the value of each asset, then calculate the total value of your assets.
Organizing your assets in this manner makes it easier for you to know the assets that have the greatest value.
Your assets should look like this once you organize them into different categories:
Step 5: Calculate The Total Debt of the Current Liabilities That You Have
You can easily calculate the amount of money that you owe to different organizations.
Input the list of your liabilities to a spreadsheet software. After that, key in the amount of money that should be paid to different organizations. Compute the total amount of debt that you owe to different organizations and banks. Group them just as you had grouped them in your list.
The total amount of debt that you owe to different organizations should look like this:
Step 6: Calculate Your Personal Net Worth Using The Balance Sheet
Your total net worth is the difference between the total amount of assets that you have and the debts that you owe to other organizations. Basically, this is the difference between your total assets and the total liabilities.
If you have more assets than liabilities, your total net worth will be positive. On the other hand, if your liabilities are more than your assets, you will have a negative net worth.
Personal Balance Sheet Example
Here is an example of how a balance sheet should look like:
This personal balance sheet template will guide you as you are creating your own balance sheet. However, you can add more sections and subsections to the personal finance statement template, depending on the assets that you own.
Why Calculating Your Net Worth is Important
Your net worth makes it easier for you to monitor your spending habits and come up with a solid financial plan for improving your financial situation.
With such information, you can easily avoid debts and manage your net income, cash inflow, and cash flow. Moreover, it lets you track your financial growth and financial goals, improving your financial health.
Your net worth also highlights the total value of your liquid assets. While your total net worth might be high, the total value of your liquid assets (cash) may be low.
Your net worth gives you some insight on the total value of your liquid assets (cash). This makes it easier for you to liquidate some of your assets.
Also, your net worth helps you apply for different cash loans. However, it is not advisable to apply for loans if your liabilities are more than your current assets.
The bottom line is that knowing your net worth helps you avoid bad financial decisions.
While creating a personal balance sheet may seem like a challenging task, it can be an easy process if you have your financial statement. Make sure that you include each and every asset that you own in your financial balance sheet.
After that, find the difference between your assets and liabilities to know your net worth.
To continue learning about financial literacy, see the following articles in the series:
- Personal Income Statement
- Good Debt vs. Bad Debt: Know The Difference
- Is It Better to Put a Large Down Payment on a House
- Dave Ramsey vs. Robert Kiyosaki: Who Should You Listen To?
I’m a money nerd, small business owner, and personal finance blogger. After job-hopping and ruining my credit in my early 20s, I decided to get serious about money and my career. Now I have top-tier credit, a successful small business, and am on a path to financial independence.