Do you know how much your net worth is changing from year to year? We all want to enter retirement with a comfortable nest egg, owning more than we owe. A good way to chart your progress toward that goal is to prepare a personal balance sheet at least every year. That will give you a score card to measure how you’re doing.
A balance sheet shows your assets and your liabilities. Think of them as what you own and what you owe. The difference between them is your net worth.
Here’s a quick guide.
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Pick a date such as the end of the year or the end of a quarter when you’ll have statements available for your financial accounts.
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Start by listing all your financial assets. Include bank accounts, balances in IRAs and retirement plans, cash value of insurance policies, stock and bond investments, etc.
- The next step is the least precise. You must assign a value to your non-financial assets, such as house, car, and personal belongings. Don’t get hung up at this stage. For most purposes, it’s not essential that you find an exact value. Using the same approach from year to year is more important.
- To value your house, look at classified ads for comparable properties, or talk to a friendly realtor. Another approach is to use the appraised value shown on your property tax statement. This is generally less than market value, but yearly changes should reflect changes in the local property market.
- For personal property, just make a reasonable estimate. Hold that constant each year unless you make any major purchases.
- Liabilities are next. List your mortgage balance and all loans. Include credit card debt, car and boat loans, student loans, and any other debt.
- Total up your assets and liabilities. The difference between the two totals is an estimate of your net worth. Hopefully it shows an increase from the previous year.
If your net worth is not increasing, use your balance sheet to see where you’re falling short. Look for ways to boost the growth of your assets, or set a budget to reduce your liabilities. Your personal balance sheet is more than just a good financial score card. It can be a valuable planning tool, too.
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