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3 Reasons Why You Need a Personal Balance Sheet

Ah, yes, the balance sheet. Brings me back to my dreadful days sitting in the obligatory accounting classes on my way to a Finance degree. I surely hated accounting then, but I’ve grown to enjoy it now that I’ve been able to apply the concepts to business and personal finance problems.

What is a balance sheet? A balance sheet is a financial statement that summarizes a company’s or person’s assets (what you own), liabilities (what you owe), and shareholders’ equity/net worth (assets – liabilities) at a specific point in time. 

My last post discussed the importance of tracking your expenses and how knowing where your money is going can help you pinpoint the exact amount you spend each month and which areas you can trim back. The balance sheet builds on that by giving you a snapshot of all your assets and liabilities as of a point in time. Below is an illustrative example of the template that we use for our personal balance sheet, recorded quarterly.

Every quarter, we enter the value of all of our assets, including cash and cash equivalents (checking accounts, savings accounts, etc.), retirement accounts (401k, IRAs, etc.), taxable accounts (brokerage account), and other assets (HSAs, vehicles, etc.).

We then do the same for our liabilities, including my wife’s student loans and the current amount we have on our credit cards. Note that we pay our credit cards in full each month, this is just the amount currently outstanding that we owe as of that point in time and will pay on the next bill.

Most people will also have a home as both an asset and liability (mortgage). We sold ours earlier this year and moved into an apartment so that is no longer a component of our balance sheet.

Below are my top three reasons to use a balance to grow your net worth.

1. Know Where You Stand

A balance sheet allows you to know your exact financial standing. No more guesswork, no assumptions. You get a hard view of your net worth by subtracting your liabilities from your assets. Recording a quarterly balance sheet was the second best thing I ever did in my personal finance journey, right behind tracking my expenses. 

My favorite part is looking at my quarter-over-quarter and year-over-year net worth percent and dollar growth. It feels great when you can grow your net worth 100% in one year! I’ll never forget when my individual net worth finally went from negative to positive (damn you, student loans!). 

It was a great feeling that I thought would take much longer than it actually did. Once my wife and I combined our personal finances, I was back in the hole from her significant dental school loans. It didn’t take too long to get positive again, and we ultimately paid her loans down aggressively until they reached a manageable level. Over the last 1-2 years we’ve invested those funds rather than continuing to pay down debt.

2. Measure and Review Progress

If you set goals but never look back to measure progress, then you are only doing yourself a disservice. Whether your goal is to grow net worth by a nominal or percent value, you need to measure your progress against that goal. I’ve found that quarterly is the perfect frequency. 

There’s too much data noise, variability, and time wasted in a monthly (or more often) frequency. Semi-annual and annual might not be frequent enough to keep your net worth top of mind and / or keep you motivated. I recommend going with quarterly and seeing if that cadence works for you.

I always look forward to the end of a quarter to see how we progressed. Now that we’re making more money than ever and have built up our investments in the midst of a raging bull market, our progress each quarter has been almost unfathomable.

3. New Goals and Motivation

Once you know where you stand and measure and review your progress, you can then determine if you reached your goal and need a new goal. If you didn’t reach your goal, you can try to determine why and either attempt to hit your old goal or come up with a new, revised goal. After all, knowledge of where you stand is only half the battle—you need to actually use that insight to improve. Seeing the total picture can help you decide whether to pay down debt, contribute more to retirement accounts, beef up your emergency fund, etc.

We currently have a (good) problem in that we hold far too much cash and it sticks out like a sore thumb on our balance sheet. This is one of the reasons why I think people should set up automatic investing as early as possible. Automatic investing takes the emotion out of it and allows you to dollar cost average your way into the market without needing to do any work.

We will update our balance sheet every quarter and share it on the blog; I’m sure you’ll all be waiting ever so anxiously…right? Do you track your net worth? Do you know anyone that tracks their net worth?

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