Why it is important to have a personal balance sheet

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A balance sheet is a type of financial statement that takes a snapshot picture of the financial position of a company on any given day. It shows how financially strong or weak a company is at the time. In other words, if a company took all assets and paid all debts today, what would be left for the shareholders?

A personal balance sheet works the same way for you because it gives you a clear picture of your financial strength and shows what is left over for you.

How do you make a personal balance sheet?

Write down all the assets you have today at their current value. For example:

• cash
• checking and savings
• car, house or land
• investments

Next, write down any debt that you owe today. Those are considered your liabilities. For example:

• mortgage
• credit card bills
• electric, phone and personal loans

What you have left is your equity, which is what is left over for you.

Assets minus liabilities equals equity.

If you have more liabilities than assets, your equity is negative. If you have more assets than liabilities, your equity is positive. As you may have guessed, negative is bad and positive is generally good.

What do you do with this information

Take the information on your balance sheet and learn from it. The advantage of having a personal balance sheet is to show what financial position you are in, so you can change it, if need be.

Say you crunch your numbers for your personal balance sheet and your equity turns out to be negative. That means your debts are larger than your assets, and if all your debts were due in one day, you would not have enough assets to cover them. The good news is that you can change your balance sheet at any time. You can increase your assets or reduce your liabilities to get yourself in a better position.

On the other hand, if your equity is positive, you might think you are in a great financial position, and you may be, because you do have all debts covered and you have money in the bank. If your equity is too high, however, your money is not working for you. You want to take that excess equity and invest it into another asset to earn interest or invest in something that will go up in value, so your money will work for you.

Another advantage to having your personal balance sheet is that you have all your assets and liabilities sitting on one page, so you know where all of your money is and where it is all going.

How often can you make a balance sheet

Companies usually do a balance sheet twice a year, but you can do one any time you want. Remember, it is your financial snapshot for one day, so anything you change in your portfolio on any day will change your personal balance sheet. For example, if you pay off a bill or get a second job, your bottom line and what is left over for you will be different.

Calculating a personal balance sheet is easy and gives you power over your own finances. Develop a personal balance sheet at least once every six months for you and your family so you can stay on track with your financial goals and make smart decisions with your money.

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