Your Balance Sheet and Net Worth
Knowledge is power.
– Sir Francis Bacon, 1597
Yesterday, we started to answer the “Where are you?” question by doing some research on ourselves. I obviously don’t think you’ve got that done already, but I’m going to move on to what to do with it. If you’re in the habit of reading financial blogs, you may already have a pretty good grasp of your finances. This series on Balance Basics will hopefully act as a reinforcement to some and as new information to others. The end of an one year and the beginning of the next is a great time to revisit the basics. I’ve found that if I don’t revisit them a few times a year, it’s easy to let other things (like life) distract me and before I know it, I lose my way again.
Your Balance Sheet & Net Worth
Your next step is to construct a simple balance sheet. You don’t need to be an accountant to do it and you can calculate your net worth quickly from there. As long as you can count, add, and subtract, you’re good to go. You’re just going to organize all the self-research you’ve done. If you are doing this on paper, draw a line down the middle of a blank sheet. On one side write “assets”. On the other side, write “liabilities”. The asset side will list anything you own in part or in full that is reasonably valuable and could be sold for money.
- Your Home: This is the estimated current value of your home, or what you could expect to sell it for today. Obviously, if you rent, you will not include this. Your mortgage balance will go on the “liabilities” side of your balance sheet.
- Your Investments: Include the present value of any investments you have inside or outside retirement accounts – funds, stocks, bonds, ETFs, etc.
- Real Estate: If you own any real estate (cottage, rental property, etc.) outside of your residence, enter the estimated present value of the property.
- Your Vehicles: There is some debate about whether vehicles should be included here, since they depreciate so rapidly. I do include them in my balance sheet, but I am very conservative in valuing them. I always put in a lowball number. Again, any outstanding loans on your vehicles will go under liabilities.
- Cash: This is liquid money sitting in savings or chequing accounts. I usually include GICs and money market funds in the “investments” category.
- Other: This catch-all category could include the estimated present value of just about anything, such as jewellery, furniture, etc. I don’t usually include these, however, as they are not readily convertible to cash, and it is unlikely I would actually sell them unless I suffered something cataclysmic. In the end, it’s your call as to what you choose to include here.
On the liabilities side of your balance sheet, include items like the following:
- Mortgage Balance: This is the amount you currently have left owing on your mortgage. If you have more than one, include them both.
- Auto Loans: This is any money you owe for vehicles.
- Credit Cards: Total the amount you owe on all of your credit cards and put it here.
- Line of Credit: If you have and owe money on a line of credit, put it here.
- Other Debt: If you owe money to anyone for any reason not already covered, include it here. This could be money you borrowed from a relative or friend, or the appliance store for that T.V., refrigerator or furniture you’re still paying off.
Next, total up your assets. Then total your liabilities. Your net worth is simply assets minus liabilities. Obviously, this is one area where you want an imbalance – to the asset side of the balance sheet. If your balance sheet is tilting toward the liabilities side, you have some decisions to make. Knowledge really is power. Just understanding where you are puts you in a position to improve your balance sheet.
Did you find anything surprising on your balance sheet? Are you doing better or worse than you thought when you started?