Different people have different methods of keeping track of their finances. What works for one might not be the best method for someone else. However, certain tools and techniques are helpful if you’re trying to keep track of the money you’re bringing in, how much you’re spending, how your investments are doing, etc.
Let’s say you’re trying to get your finances on track. That might involve limiting frivolous spending, looking into a debt repayment calculator, or allocating money toward your eventual retirement. If so, learning how to use a personal balance sheet could benefit you.
We’ll take a moment right now to talk about personal balance sheets. When we’re finished, you’ll understand what they are and why so many individuals use them regularly.
What is a Personal Balance Sheet?
If you’re unfamiliar with this term, a personal balance sheet is a type of financial statement. It gives you a simple, comprehensive snapshot of your wealth. The average personal balance sheet will include, but not necessarily be limited to:
- Your liabilities, meaning what you owe
- Your total assets, which are what you own
- Your net worth, which is simply your total assets minus any current liabilities
There are several websites and financial entities through which you can obtain a personal balance sheet. Some people even create one on their own, though that’s not often the best strategy. If you try to compose your own balance sheet, you might forget to include certain liabilities or assets, and you won’t get the most accurate financial picture.
Why Are Personal Balance Sheets So Useful?
The reason why personal balance sheets are so useful and why using one can help get your finances on track is because they’re one of the most accurate ways to calculate your net worth. If you’re attempting to figure out when you can retire, whether or not you can buy a house, or anything else having to do with your finances, this tool can go a long way toward providing those answers.
With a personal balance sheet, you can see all your liquid assets, such as how much you have in your checking and savings accounts and what CDs you own, as well as your illiquid assets, such as houses, vehicles, artwork, or furniture. You will also have a list of your investments, such as mutual funds, stocks, and bonds.
Regarding liabilities, you can see any credit card debt you have, any payments you still owe on cars or houses, any current bills, and any outstanding loans.
You Can Use a Personal Balance Sheet to Help You Make Major Decisions
Many people have to deal with financial uncertainty. For instance, you might want to move from an apartment into a house for the first time, but you’re not sure if you can afford the down payment. Maybe you need to replace your current vehicle, but you’re uncertain whether getting a brand-new or used one makes the most sense.
If you can see your finances, including your net worth, in black and white on a personal balance sheet, it makes deciding what to do much easier. It makes planning for the future simpler as well.
With that sheet in front of you, you can more accurately determine how long it’s going to take you to pay off credit cards and other outstanding debts. You can decide whether buying a vacation home you’ve had your eye on is possible. You might figure out how much you can spend on a wedding or when you can afford to do some major home renovations.
A Personal Balance Sheet Can Help You in Any Phase of Life
Creating a personal balance sheet is never a bad move. Doing so can assist you in keeping track of your finances. This can help your family as you plan the next stages of your life together in both the long and short term.