|Count your (nest) eggs|
Materials: financial records
Project difficulty: easy
The personal balance sheet gives you a snapshot of what you own and owe, and the difference is your net worth. If you feel yourself avoiding complete knowledge of your finances, try to change your perspective. Your situation is not "bad" no matter how dire. Good and bad only come into play with what you do now.
First outline your family assets. Assets are things of value that can be measured and converted into cash. You want to list out your assets with the most liquid and least volatile first. Liquidity refers to the ease with which the asset can be converted to cash. Volatility measures the potential difference in the value of the asset over time. For example, cash on hand or cash in a bank account would be the most liquid asset (it’s already cash!) and least volatile (the value doesn’t go up or down). Therefore you should get your bank statements together for the most recent month and add them together less any outstanding checks.
Next up are stocks or other investments. These assets are usually liquid because they can be converted to cash easily by placing a trade with your broker (but may have penalties for early withdrawal, such as retirement accounts). However, they are more volatile than a bank account because the value at any given moment could be higher or lower. Vehicles can also be added to your asset category. They are usually not very liquid, since it could take you some time to sell your car or boat. Also, the price tends to be somewhat volatile and usually in a negative direction as you drive your car and newer and better models come on the market.
Finally any property such as land and houses should be considered. Take the total market value of your house, we will take care of the mortgage in a second. Houses and land are generally the least liquid asset on this list. Not only do you have to find a buyer, you have to pack and move all of your stuff! And as we have seen in the last decade, prices can fluctuate wildly up and then rapidly down.
What about other things of value that you own? In general your clothes, furniture, kitchen appliances and so on could be sold for money, but not much in the grand scheme. This is just for you, so there's no need to go into extreme detail.
After listing out the assets, you should now focus on what you owe. Start with credit card statements followed by any car or home equity loans and finally your mortgage. Organize debts into two groups, current and long-term, or those due in a year and those due after a year. For your mortgage, for instance, you will have a portion (12 monthly payments) due in a year and the rest due later. Total up the numbers and you get your net worth.
At this point take some time to look at the details as well as the bottom line. Remember how we organized the assets in order of liquidity and volatility? Now you can match those up with the current debt and long-term debt. Even if you have a positive net worth, you might find that you have more current debt than liquid assets. Alternatively, maybe you have more than enough assets with low-volatility, so maybe it’s time to think about investing some of those assets.
Regardless, don’t focus exclusively on your net worth – realize what goes into that number and what that make up means for your financial position. You should start making goals not only about what your bottom line will be 1, 10, 30 years from now, but also how you want your personal balance sheet to look. Do you want to leverage mortgage debt in order to be more liquid? Do you want to pay down all your debts in the next 5 years? These are the types of planning issues I hope to explore later. For now, congratulations on creating your personal balance sheet! You have taken an important step in taking control of your financial life.