Want to hit “70” on the weighing scale? How much did you weigh when you started?
Wish to reach 10,000 followers on IG? How many do you have today?
200K YouTube Subscribers is what you’re looking at? Are you at 200 or 20k right now?
Looking for a 20% raise in your income? 20% of what?
Where is it that you want to move upwards from?
Do you know where you stand at present?
Have you done an assessment of your current status?
If the answer to these questions is a Yes, then you’re on the right track my friend.
However, if your answer is a NO, then fret not.
It’s never too late to assess and begin.
Knowing where you stand and acknowledging it is the key to any journey.
You must know your “From” to get to your “To”.
As important as a clarity of your goal is, it is equally beneficial to know where you’re starting from.
Let’s delve deeper into this and see how to chart out your Personal Balance Sheet.
You may actually be surprised to know that you’re better off than you think.
What is a Personal Balance Sheet?
A Personal Balance Sheet shows your assets (the things you own and that add to your wealth) and liabilities (the things you owe to another person).
It provides a snapshot, at a specific moment in time, of your financial health.
The purpose of creating this is to keep a track of your net worth.
Net Worth is calculated by subtracting your liabilities from your assets.
Net Worth = Assets – Liabilities
Once you have this in place you can confidently make financial decisions.
How to build a personal Balance Sheet?
Broadly speaking, there are just two components to a balance sheet – Assets and Liabilities.
In Step 1, list down all the assets that you own, such as:
- Savings Account
- Cash Balances
- Investments in Mutual Funds, Fixed Deposits, PPF, Bonds
- Employee Provident Fund
Confused about certain items? Just ask yourself this question, “Can I sell this for money?”
If your answer is a Yes, then it is an Asset.
In Step 2, in a similar manner, list down all your liabilities. These could include:
- Credit Card Balance
- Student Loan
- Home Loan
- Vehicle Loan
- Personal Loan
- Money your borrowed from your friend or your dad
In Step 3, assign values to each of your assets. For Bank & Cash balances and Investments write the values as is on that date.
For assets like Home and Vehicle you need to assign the Selling Price as on that date and not the price that you bought them at. Try to be conservative while assigning values to assets to prevent inaccurate results.
For the liabilities, write down the amounts that you owe as on date.
For loans, you must write the principal amount that is due. Do not include amounts paid off or costs that are not yet incurred (no future interests to be added).
E.g.: Vehicle Loan: Initial Loan Taken: INR 15 lakhs @ Interest of 9.5% p.a. Amount due today – INR 5lakhs. The amount to be fed into your Net Worth calculator will be INR 5,00,000 and the interest amount will not be added.
For Credit Card Balance: The amount due as on date should be added to the Balance Sheet. Suppose you have missed the due date and the bank has already charged you an interest, then the value that sits in your Balance Sheet will be the due amount + the interest charged.
|Personal Balance Sheet of Ms. ABC as on 31st Aug’20|
|Assets||in INR||Liabilities||in INR|
|Cash in Hand||60,000||Credit Card – CITI||30,000|
|Savings A/C – PNB||40,000||Credit Card – Amex||40,000|
|Savings A/C – ICICI||1,20,000||Vehicle Loan||1,00,000|
|Savings A/C – INDUSIND||50,000||Money borrowed from Dad||50,000|
|Fixed Deposits||2,00,000||Money borrowed from Ray||25,000|
|Total Assets||12,70,000||Total Liabilities||2,45,000|
In Step 4, calculate your Net Worth by deducting your liabilities from your assets.
As we can see above, Ms ABC has a positive Net Worth. She might have been hard on herself thinking that she doesn’t have money since her liabilities are almost equal to her cash + bank balances. But by creating her Balance Sheet she will realise that she is actually in a good position financially and can easily reduce her liabilities as she has the funds available for the same.
Whether you have a positive or a negative net worth, once you know what it is you can make mindful financial decisions and inculcate healthy financial habits. Use it as a tool to keep you motivated.
You may want to focus on building an Emergency Fund or may want to prioritise clearing off your Debt. You may also consider reviewing your investments and may end up reshuffling your portfolio.
With this snapshot before you, you can create financial goals and plans aligned to your current reality. You will be in a position to assess where you want to be with a more realistic approach since you’re aware of where you are now.
Keep updating this Balance Sheet at regular intervals – quarterly, half yearly or annually to know how close you are to hitting your milestones.
Or you may also update it if you’ve acquired a new asset or paid off some liabilities. It is completely up to you as to how often you wish to update this.
Your goal should be to keep improving your Net Worth. Draw up goals that would make you want to wait for the next update of the balance sheet.
Open that spreadsheet and write them all down. Get Going Now!!!