Everyone agrees that getting into the right balance can be a tricky proposition — whether it’s exercising more, eating better, or doing more volunteer work, most people are constantly trying to get themselves into better balance. That’s a great thing, but what about getting your finances into better balance? A balance sheet is an essential part of any business. Managers, analysts, and investors all spend countless hours examining the balance sheets of corporations and other businesses.
Assets are future economic benefits to the business, liabilities are the future economic liabilities of the business, and equity is residual excess/deficit that is left over after subtracting all assets from liabilities. There are dozens of metrics to help measure balance sheet ratios, and nearly as many strategies and theories to improve them.
Why, then, should your own personal balance sheet receive any less attention?
You may not think of yourself as a business, but you are. You are the business of you, and like any business, you are trying to 1) deliver the best product possible, and 2) keep yourself in the best financial shape possible. That involves several components: the income statement; the balance sheet; and the statement of cash flows. We discussed the income statement last week in (INSERT LINK HERE), are reviewing the balance sheet this week, and will be touching on the statement of cash flows next week.
Just like a business benefits from a stronger balance sheet in the form of greater financial flexibility, market confidence, and increased asset values, a personal balance sheet can also benefit your personal financial life. Creditors will look more favorably on you if you are looking to borrow funds either for a residence or starting a small business, and having a more thorough understanding of your asset and liabilities will give you a much greater piece of mind.
A few steps to help you compile your own balance sheet:
1) Review your financial life and determine what you own
2) Determine what you owe, i.e., is there a mortgage, student loan, or credit card debt?