By: James Philpot
How well off are you? Where are your financial strengths and weaknesses? In recent columns, my colleague Rayanna Anderson discussed using financial statements in managing a business. You can similarly approach your personal finances and goals, and in this column I will begin a series on personal financial statements by discussing the balance sheet.
A well-constructed personal balance sheet can provide insight for financial questions regarding debt management, investing, risk management and estate planning. Just like a business’s balance sheet, your balance sheet shows the values of your assets and your liabilities (debts) at one point in time. However, a personal balance sheet actually reflects better accounting than a business balance sheet because personal assets are valued at market value, whereas business assets use historical cost.
To compile your balance sheet, you will need account (bank, brokerage, insurance, retirement, etc.) statements, real property (including personal and business assets) values and the outstanding balances of your debts.
The assets section of a personal balance sheet has three categories. Cash assets are very liquid and safe, easy to value and easy to spend. These include cash, bank accounts and short-term money market securities. Financial planners often view cash assets as a source of emergency funds. Investment assets are long-term assets held for gain and are more risky and less liquid than cash assets. Stocks, bonds, retirement accounts, cash value life insurance, mutual funds, rental property and closely held business interests are common investment assets. Sometimes, as in the case of rental property of business interests, investment assets may require sophisticated valuation, but your best estimate will work for a start. Personal use assets are tangible assets — personal residence(s), vehicles, jewelry, collections, etc. — that while valuable, are not usually considered as investments. Like some investment assets, personal use assets may require effort to value. Sometimes Web-based marketplaces like kbb.com (cars), eBay or Craigslist (personal property), or a local real estate broker’s listing site can provide comparison values for personal use assets.
To construct the assets section of your balance sheet, organize your assets by category and list the asset and its balance or estimated value. For planning purposes, it can be very helpful also to note the ownership (husband, wife or joint) of the individual assets/accounts and whether an asset or account has a named beneficiary or pay/transfer on death recipient, as it will affect the transfer of assets outside of probate. Summing the value of each asset item gives us total assets — the value of what you own.
The liabilities section includes the balances owed on all of your outstanding debts. Each item’s value on the balance sheet is typically the principal balance remaining. The liabilities section has two categories. Current liabilities are balances due within one year and include credit cards, apartment lease obligations and other short-term borrowing. Long-term debts are due in more than one year and include home and car loans, student loans, etc.
Your personal net worth is the value of your total assets less your total liabilities. Financial planners use net worth as a starting point for assessing individual or family financial well-being. In future Bears Business Briefs columns, I will discuss other financial statements and their use in analyzing your financial position.
This articles appeared in the September 26 edition of the Springfield News-Leader and can be accessed online here.
James Philpot is a certified financial planner and is associate professor of finance at Missouri State University.