Personal Balance Sheet

Published on :

21 Aug, 2024

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A Personal Balance Sheet is a comprehensive financial statement that lists all assets and liabilities and aids in determining an individual's financial health, budgeting, and goal setting. It helps monitor money and debt, enabling the creation of financial plans and goals and ultimately enhancing their financial planning and goal-setting abilities.

It is an accounting tool that assists with managing and organizing money so that an individual is aware of their assets and debt. As a result, this sheet helps identify opportunities for improvement by giving a current summary of all assets and liabilities in a person's financial condition. It facilitates comprehension of how financial decisions affect a person's financial well-being.

What Is A Personal Balance Sheet?

A personal balance sheet is a comprehensive financial statement that lists assets and liabilities, aiding in financial health assessment, budgeting, goal-setting, and financial planning.
It is essential for financial assessment, goal tracking, planning, debt management, decision-making, and estate planning, providing a comprehensive view of assets and liabilities.
The personal balance sheet format is simple; it contains assets, liabilities, and net worth.
The procedures involved in creating a personal balance sheet include listing every asset, enumerating each liability, calculating net worth, and deducting of liabilities from assets.

Personal Balance Sheet Explained

A personal balance sheet is a financial statement that people use to evaluate their financial situation, make plans for the future, and establish goals. Thus, it shows a person's financial status by listing all of their assets and liabilities. Additionally, using the balance sheet, one can calculate an individual's equity, or net worth, as the amount they would have left over after selling all of their assets and paying off all of their debts. Therefore, financial planning requires the accurate classification of assets and liabilities by a comprehensive balance sheet, which provides information on total assets and debt levels.

It is an invaluable instrument for directing people's financial planning. The precise summary of assets, liabilities, and net worth that it provides facilitates making smart decisions. Thus, it helps individuals evaluate their existing financial situation, evaluate their strong and weak points, and establish reasonable objectives. With this knowledge, people may prioritize paying off debt, make sensible budgetary decisions, and set aside money for investments and savings.

While creating a balance sheet, an individual can identify opportunities for long-term planning, such as budgeting for retirement or education and optimizing financial resources in various areas. Thus, people can create a thorough financial plan customized to their unique situation and objectives with the help of this sheet in the end.

How To Create?

Making a balance sheet involves the following steps:

Enumerating all assets
Making a list of every liability
Subtracting liabilities from assets to find their net worth

Let us have a look at them in detail below:

#1 - Enumerating All Assets

A person's purchases, earnings, and inheritances are considered assets. In the United States, liquid assets are listed first, and long-term assets are listed lower on a balance sheet. Hence, the balance sheet contains information about the accounts receivable, the amount of cash and its equivalents, fixed assets, inventory, investments, land, buildings, etc. We can collect accounts receivable and exchange them for cash, making them assets. Physical currency, checking and savings accounts, and certificates of deposit are examples of cash and cash equivalents. Businesses sell items, which are referred to as inventories, to customers in exchange for payment. Although they can be sold for money, fixed assets like furniture, electronics, and cars are best retained. Depreciation causes fixed assets to lose value as they age.

Bonds, mutual funds, equities, and exchange-traded funds (ETFs) can all be investments, including funds in retirement accounts. Investors often hold investments for more than a year. A security is classified as marketable or cash on the balance sheet if it is planned to be sold during the current year. In the case of land and buildings, the land is not depreciated on a balance sheet, although buildings are. Assets also include retirement accounts. IRAs and 401(k)s are frequently combined with them, are postponed until retirement age, and require access or penalty payment upon retirement.

#2 - Making A List Of Every Liability

Money due to someone, whether immediately or over an extended period, is referred to as a liability. Getting expensive assets, such as a loan to purchase an asset like a home, might result in increased liabilities. Thus, certain liabilities, like accounts payable, are due within a year; credit card debt and overdue power bills are a few examples of current liabilities. Long-term debts, like student loans, car loans, mortgages, and leases, come under noncurrent liabilities.

#3 - Calculating The Net Worth

The formula for calculating personal net worth involves adding up all assets and liabilities and subtracting total liabilities from total assets. Therefore, it provides valuable insight into an individual's current financial position and aids in future financial planning.

Examples

Let us look at a few examples to understand the concept better.

Example #1

Let us take the hypothetical example of Daisy, who works as an accountant.

The following are her expenses and income details:

Checking account=$10,000
Savings account=$10,000
Home mortgage=$25,000
Stocks=$2,000
Vehicle loans=$5,000
Bonds=$1,000
Certificates of deposits=$500
Investment in 401(k)
Personal tax payables=$550
Insurance payable=$2,700
Primary residence=$50,000
Accounts receivables = $20,000

Let us now calculate her net worth by subtracting liabilities from assets.

Assets= 10,000+10,000+2,000+1,000+500+2,500+50,000+20,000
Liabilities=25,000+5,000+550+2,700
Her total assets are $96,000, and her total liabilities are $33,250.

Her total net worth = assets-liabilities = $62,750.

One can also calculate it using a personal balance sheet Excel template.

Example #2

The State of Washington Department of Financial Institutions, Security Division, has a standard format of personal balance sheet for individuals to calculate their net worth. It asks for personal information such as name, mail ID, phone number, etc. Details of income received in the form of commission and salary follow. Further, the asset column has broad categories such as cash, which includes checking accounts and savings accounts; investments, such as individual retirement accounts, real estate, and other assets (business interests).

On the other side, liabilities include details of liabilities such as personal and real estate taxes payable, loans, and home mortgages.

Importance

Some of the reasons why a personally laid-out balance sheet is important are:

Financial Assessment: It provides a comprehensive view of assets, liabilities, and net worth, assisting individuals in assessing their overall financial well-being.
Goal Tracking: The personal balance sheet allows individuals to track progress toward financial objectives and make smart, informed decisions to achieve them.
Financial Planning: It guides financial planning by identifying areas of strength and weakness, facilitating budgeting, and guiding investment strategies.
Debt Management: The document enhances understanding of debt obligations and enables the formulation of effective strategies for debt management and reduction.
Decision Making: It provides a foundation for informed decisions about spending, saving, and investing based on an individual's financial position.
Monitoring Financial Progress: It allows for continuous tracking of financial progress over time and allows room for making adjustments as needed.
Estate Planning: The document offers insights into an individual's financial situation, aiding in the development of estate plans and wealth transfer strategies.

Frequently Asked Questions (FAQs)

How to make a personal balance sheet in Excel?

Individuals could use a personal balance sheet Excel template. For this, set up columns for assets, liabilities, and net worth. Enter item names and values in their respective columns, and then calculate the net worth.

How often should a personal balance sheet be updated?

It is advisable to update personal balance sheets regularly, preferably on a monthly or quarterly basis, to reflect changes in assets, liabilities, and net worth. However, it depends on the individual.

Does a personal balance sheet have to be balanced?

The difference between assets and liabilities can determine an individual's net worth. However, the tallying of assets and liabilities rarely happens. If the person's liabilities are more significant, their net worth is weaker, and if their assets are higher, their net worth is more substantial.