The Basics of Personal Balance Sheet

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Most people hear the term “Balance Sheet” and immediately associate it with a business, which isn’t a “wrong” response, however, I would contend that it’s also relevant, or at least it should be, for individuals and families alike. So, what is a balance sheet? Never thought you’d ask…

A balance sheet is a financial document that reflects three components that ultimately “balance”… go figure. The three components are:

· Assets—these are things you own that have value: bank accounts, investment accounts, physical assets like cars or houses, etc.

· Liabilities—these are things that you owe on and/or financing for the things you own: student loans, mortgages, credit cards, etc.

· Owners Equity—this is the difference between assets and liabilities, also known as your “net worth”

Let’s take a look at the formula and an example:

Assets = Liabilities + Equity


Person A has a bank account valued at $10,000, a house valued at $150,000, and $5,000 of personal items. They have a mortgage on their house of $130,000 and $2,000 in credit card debt. So in this example:

Person A’s assets = $165,000 (10,000+150,000+5,000) Person A’s liabilities = $132,000 ($130,000+$2,000) Person A’s Equity = $33,000 ($165,000-$132,000)

Assets ($165,000) = Liabilities ($132,000) + Equity ($33,000) OR in other words,

$165,000 = $165,000 and thus, they balance!

There are many different things to observe in a balance sheet but one of the important metrics that I personally use with all of my clients is “Equity” or in other words, “Net Worth.”

You may hear Hollywood refer to a celebrity’s “net worth” or what they are “worth” and this is essentially the same as the “Equity” element in our formula. If you move around the formula a little, you have the following:

Net Worth (AKA Equity) = Assets – Liabilities

Ultimately, the goal is to see this net worth number increase in value. There are two ways it increases in value; either you increase your assets meaning you save more of your income, increase your investments, etc. OR you decrease your liabilities meaning you pay off your debts. Either of those actions results in an increase in net worth.

Lastly there isn’t a “golden number” you should be aiming for. I get the question all the time of “what should my net worth be?” or “what should I have saved for retirement?” and there is simply no way to answer that broadly. Every person has different needs, goals, aspirations, lifestyles, etc. so it needs to be a very personal discussion amongst your family and with a financial professional/tax professional/attorney. The important thing I do want to mention is that regardless of the amount, the action of increasing net worth over time is always the goal. Your journey may just look a little different than your neighbor.

Photo by Piret Ilver on Unsplash

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