Today, I have a habit of updating my balance sheet on a monthly basis. Such is a way to keep track of:
- Past: Did I make any progress from previous months?
- Present: Where do I stand financially today?
- Future: How close am I towards my financial goals?
- With my balance sheets, I can make better financial decisions that contribute to my net worth. To name a few, such decisions include real estate, car, retirement funding, investments and so on. It is about optimizing capital allocation in order to attain sustainable growth in net worth while enjoying life.
Now, you may notice that I use the words: “balance sheet” and “net worth”. So, what do they mean and are they related? No worries. Here, I’ll explain both the terms and will offer a simple step-by-step guide that allows you to easily build a balance sheet of your own. Of which, you can find out your net worth and work towards your desired net worth in the immediate future.
What is a Balance Sheet?
A balance sheet consists of 3 components:
- Assets: What You own
- Liabilities: What You owe (debts / borrowings)
- Equity (Net Worth): What You really own after deducting all liabilities
A balance sheet is named as such because the value of assets must be balanced or tallied with the value of both liabilities and equity (net worth)
Equity = Assets – Liabilities
Step 1: How to Calculate the Value of Your Assets?
Assets are things you own. They include hard assets such as real estate and cars and liquidable assets such as cash, FDs, stocks, unit trust funds, precious metals and cryptos. Personally, I make a distinction between hard and liquidable assets as I want to maintain a high level of financial liquidity to avoid financial distress, especially in times of need.
Let’s start with hard assets: real estate and cars. I use their best estimates when inputting their asset values into my balance sheets. For properties, I use “verbal valuation” obtained from my bank’s panel of valuers as I had already bought my real estate a number of years ago. As for my car, I would use the sum assured of my car insurance policy as its current estimated value.
What about EPF or CPF? Are they hard assets as they are almost inaccessible till we reach our retirement age? To me, yes. I’ll include EPF and CPF as hard assets on my balance sheets.
For liquidable assets, this is simple. Most of them have quoted values. Hence, it is just simply copying and pasting their current values onto my balance sheets.
Step 2: Make a list of Your Liabilities
Liabilities are debt that you owe. You can list them down with details such as:
Type of debt
Outstanding amount
Effective Interest rate
Step 3: Calculate Your Net Worth
Finally, once you have figures for both total assets and liabilities, you can obtain your current net worth by deducting your liabilities from your assets.
Of which, you can assess your financial standings more accurately. For instance, if you don’t have much in assets and have negative net worth, it’s very likely for you to be either a financially poor person or one who is just starting out. But, in another case where you have assets (which do not generate income) and owe a lot of debt, it’s likely that you are middle class.
You are most likely a rich person if you have income-producing assets which are substantial and have minimal low-interest debt.
By Ian Tai- Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia
