There are 3 tools that folks can use to manage their personal finances. They are a personal life plan, a personal budget and a personal balance sheet. When these tools are identified to folks most acknowledge a life plan but do not really have one. Most know and try to have a budget…sort of. However, an amazing number of people have no idea what a balance sheet is. So here are the basic things you should know about a balance sheet.
A balance sheet is where you keep track of how much you own and how much you owe and the difference between the two. You take the value of your assets (what you own) and subtract the value of your debts (what you owe) to get your net worth. You should know what your net worth is at any given time. It is also important to know the value and structure of your assets and liabilities.
Your net worth should be a positive number. The older you are the bigger the number should be miracle sheets review . That is because you will need this net worth to finance your retirement when you can no longer work to provide income to your budget. The assets in your balance sheet fund your retirement in three ways. They keep costs down. The best example of this is home ownership. If you own your own home you will not have to pay a mortgage payment. That means you need 30% less to live on each month. The second way that assets fund your retirement is that you invest them in income producing assets such as Certificates of Deposit, Bonds or dividend producing stocks. A third way is that you can sell off assets at a gradual pace to fund your budgetary needs as you age. A reverse mortgage is a good example of this.
An asset is an item of value that you own. It has a market value that is the amount that you can sell it for. The value is what the item would sell for if you had to sell it in the short term which may be days or months depending on the asset. When valuing your assets you must consider this and be honest about exactly how much your asset would sell for in the short term. The total value is written down as the asset on your balance sheet. There may be an offsetting liability. For a house it would be the mortgage or any other debt secured against the home. For a car it would be a car loan. The difference between the value of the house or car and what is owed is the equity in that particular investment. This is like a net worth for that particular asset.
There are appreciating assets and depreciating assets. A home is generally an appreciating asset over the long term. In recent times we have learned that in the short term a home can lose its value rather quickly. However, most housing markets recover in the long term and a home should appreciate over time. A car is almost always a depreciating asset. That means that as it ages it becomes worth less each year. Appreciating assets are more balance sheet friendly than depreciating assets.
Assets that can have a lien put on there are the only ones that banks or other lending institutions will consider as valid as asset entries on a balance sheet. Things like furnishings and jewelry are not considered assets for use in getting a secured loan. Items such as the unused part of a line of credit or credit card limit are not assets on any form of balance sheet.
Liabilities are what you owe. Any form of debt is a liability. There are many forms of debt. There is secured debt. That means that the debt is secured by a lien against an asset that you own. The lien and the debt should be for less than the resale value of the asset. Unsecured debt does not have any such lien and is hopefully based on your capacity to service the debt. The problem with unsecured debt like credit cards is that it is not offset by some asset that you own and acts only to reduce the net worth on your balance sheet.