You can never reach your destination without knowing your current location or starting point, and a journey to financial success is no different. The balance sheet or net worth statement is your personal finance road map. Most people don’t know how much they are worth. Just for fun… jot down a guess of what you think you are worth. Now fill out a balance sheet and find your true net worth.
You will need to put on paper—what you own (assets) and what you owe (liabilities). What you own minus what you owe is your net worth. Enter account balances or estimated market values of what you own in the asset column. Enter outstanding loan balances or what you owe in the liabilities column.
To find the value of your household items, estimate what you would get if you sold them at a yard sale. Used furniture and appliances lose about 50% of their value. Find the approximate value of your home at www.zillow.com or www.cyberhomes.com . To find the approximate value of your car go to www.kbb.com or www.autotrader.com.
Make a list of your ASSETS that will include: Principal residence, other real estate, automobiles, checking and savings accounts, CD’s, money market accounts, 401K, Roth IRA, and retirement plans, stocks and bonds, insurance (cash value), household items, antiques, collectibles, jewelry, other assets.
Now make a list of your LIABILITIES that will include: mortgages (1st and 2nd), home-equity loans, credit lines, credit card balances, auto loans, student loans, other debts.
Total your assets and your liabilities columns; now subtract your liabilities from your assets. If your assets are larger than your liabilities, you have a positive net worth. If your liabilities are larger than your assets, you have a negative net worth.
Don’t be discouraged if you have a negative net worth, this is your starting point; by following a debt reduction plan you will be moving toward a positive net worth.
It is a good idea to repeat this exercise frequently to keep track of how you are doing. Some people repeat this every month; it is encouraging to watch your net worth grow as you are paying off debt. The results will let you know if you are moving in the right direction.
I recommend filling out this form at least once a year and compare it to last year’s form.
Date this and keep as a record for future use.
Now that you have looked at what your net worth is consists of, before you make your next purchase, you will want to ask yourself this question; “Will this make my net worth go up or go down”?
If you are planning to buy a new car or a Plasma HDTV and ask will my net worth go up or down? Your answer is it will definitely go DOWN, something to think about before you sign on the dotted line.
If however you take the money you were going to spend on either of those purchases and invest it, your net worth would definitely go UP.
This information is an excerpt from Financial Freedom 101 by the same author.
Filed under: personal finance | Tagged: credit card, invest, net worth
