Knowing how your finances add up is imperative if you want to create an effective savings plan. Even if you’ve never heard the terms balance sheet, this financial power tool is easy to learn and start using right now.
To make a rudimentary balance sheet, draw a line in the center of a fresh sheet of paper. At the top of the left column, write the word “Assets.” Below this, make a list of what you own, placing the value of each asset on the left side of the column. Your assets may include your home, your car, the money in your 401K account or nonretirement investment account, your checking and savings account balances, and anything else of significant value, such as your business or your stamp collection. Utilitarian items like clothing and dishes can be left off the list. At the bottom, add up everything in the “Assets” column and write the total. This is the approximate financial worth of what you own.
At the top of the right column, write the word “Liabilities.” Below this, list all your debts, placing the dollar value of each on the left side of the column. Examples include the remaining balances on your student or car loans, your credit card debt, and the amount you still owe on your mortgage. At the bottom, add up everything in the “Liabilities” column and write the total. This is how much you owe.
To calculate your total net worth, subtract what you owe from what you own. If this is a positive amount, good start! If your total net worth is negative, adjust the goals of your financial plan to get yourself in positive territory. This total net worth is directly tied to your cash flow. When your cash flow is positive, your total net worth increases. When it’s negative, the debt side of your balance sheet gets heavier, which weighs on your financial health and happiness.