Blog PostLifestyle

How to Create a Personal Balance Sheet

Do you believe your financial situation is under control? How would you even know?

The only way to take a pulse of your financial situation is by running the actual numbers.

It’s weird, but I enjoy calculating my net worth on a regular basis and using that to see how my personal financial situation has improved or stagnated.

Calculations, like net worth, paint a picture of your current financial success or demise. Click To Tweet

When we do well financially, we like to look at the numbers. When we feel things aren’t going well, we tend to ignore our finances altogether.

I recommend calculating your net worth regardless of how much money you make. It’s pretty easy to do and here I want to walk you from beginning to end on completing a personal balance sheet. It is a simplified version, but you may be asking, what’s the point?

Your Balance Sheet

Businesses have balance sheets. Financial statements, as their called, allow investors to see all the financial workings of a public company. People use this information to determine if they want to buy stock or own a piece of that company. Balance sheets show financial information like assets, debts, and equity. If businesses create financial statements, then we should too.

We can see which assets grow, debts you should reduce, and whether or not your retirement fund will last the rest of your life. There are many other things you may notice as well. Again, I’m going to walk through a simplified version balance sheet just to get you started.

Step 1: Net Worth

First, create a table with two columns. You can do this on the computer or on a piece of paper. One side should be the date and the other side is your calculated net worth. From time to time, you can use a spreadsheet to make a nice little graph of this information, allowing you to really see the benefit of all of your financial moves. This table is just your net worth tracker from month to month. We will come back to this step later on.

Now, the toughest part of this process is actually getting all of the information. In order to be able to really see your progress, you need to calculate your net worth repeatedly over time. You might also want to keep track of other things over time, such as your total savings or your monthly spending over a long period.

Step 2: Gather Data

So, how do you come up with the data in your financial balance sheet? The easy way to do it is to use a data aggregator like Mint or You Need a Budget. Each week or each month or each quarter, your accounts and your net worth will be calculated automatically – nice and easy.

Even before I started studying to become a financial planner, I would assemble a monthly personal balance sheet in Excel. Once a month, I sit down and figure up every number that might be a good indication of my financial state and record it. If you want to use the same template as me, you can download it at the end of this article.

Step 3: Assemble this Personal balance statement?

The easy way to begin your personal balance statement is to use financial software, which is what my firm uses, and be done with the process. I prefer manually entering each number because it keeps everything top of mind for me. I usually do this at the very beginning of each month when my mortgage is due so I know exactly how to allocate each dollar every month.

If you choose the manual path, the personal balance sheet contains four sections: Income, Expenses, Assets & Debt. Again, you can write these down on paper or create a spreadsheet in Google Sheets or Microsoft Excel.

Quick side note: accountants and other planners may perform this differently, but I’m showing you what has worked for me.

The first section is for Income.

I include every source of income for the month along with the amount. This is money earned from your job, any side jobs, and you could even include gift cards if you want. I then add them all together for a total number. Do not include interest earned or investment growth as income here. This section will be monthly amounts.

The second section is for Expenses.

The section for calculating your financial expenses usually takes the longest, but it’s well worth it. I go through my expenses and sort them into separate categories: groceries, eating out, entertainment, utilities, gas, cell phone bill, and a few other basic categories. Do your best to get the actual total cost for each expense. To find the numbers, go into your credit cards statements and bank accounts online and nowadays there are expense trackers for you. These will show you the total amount spent on groceries and your other expenses. The other option is to review your previous purchases and add up everything you spent money on. This section of expenses should be a monthly amount.

After that, we are halfway done. Now for Assets.

You want to list every account and major asset you own, along with the balance for that account or the value of that item, then total them. Things like precious metals should be included. I have silver coins for instance, so bullion counts, any rental home market values, your current home value, IRAs, cryptocurrency if you have it, brokerage accounts, etc.

The only questionable asset on your statement is your current home. How to handle this item varies depending on who you ask, but for this exercise, you will place the value into your assets category. This section will be your full outstanding balance, not your monthly payment amount.

Last, your Debts.

I list all of my debt accounts along with the amount I still owe, then I total them. Debts include items like credit card balances, student debt, the mortgage left on your home, a car loan, a boat loan, etc. Your debts aren’t the monthly or yearly amounts you pay for items you’ve bought. The debts for this piece of the statement will be the remaining amounts you still owe.

Once you are done. There are three big things I like to look at over time.

Income minus expenses over time.

This is the so-called “gap,” the one demonstrating how much money you spend. This number should be as large as possible. If it’s small or even negative, it’s time to focus. Ideally, it should stay the same or widen over time as your income increases.

Assets minus debts over time.

This shows your net worth growth over time. If your “gap” is large over time, then this should be steadily going up over time as well. Sometimes it can grow quickly if the stock market is doing well. This is the number you want to record on your Net Worth table we created at the beginning of this exercise.

Lastly, I track the change in assets each month (minus income).

This takes more time and is a bit more advanced. I use it specifically for my HSA account, IRA, 401K and Crypto accounts. 

Tracking your assets shows the growth in your investments over time, but don’t include your own contributions in this formula. When you see your income-producing assets increasing each month at a rate that’s greater than your expenses, then you’ve reached the point of financial freedom.

 

These three formulas create a great visualization of how your personal finances are improving over time and, for me, they provide motivation to keep my nose to the grindstone.

The first time always takes the longest, but once you’ve created your table, you are just plugging in numbers each month and it’ll only take you about 15-30 minutes to complete. After a few months, you can take those numbers and create some very compelling views of your own financial situation, and you don’t need any fancy software to do it.

If you want to use my template, here it is!

Share Your Thoughts