Personal balance sheet is your 'report card' on finances
Compiling a personal balance sheet that defines your assets and liabilities to determine your net worth is an important financial exercise. It offers these benefits:
1. Estate planning depends heavily on the size of your estate. Unless you know how much you're worth, you can't adequately prepare for estate-tax liabilities. Developing a net worth statement is equally important for singles and couples.
2. Most people do not know how much they're worth. When a definitive net worth statement is finished, most are suprised at the total.
3. Compiling a personal balance sheet is a vital aid in determining whether you are gaining or losing financially. Most couples show a steadily rising net worth due to inflation and the increasing equity value of their house and other property. A balance- sheet calculation that shows a decrease could be a warning signal. a specific event could be responsible -- a casualty loss, a big medical bill, or children's college expenses.
Your net worth or "how much you're worth" is the bottom line result when you prepare a personal balance sheet. When total liabilities are subtracted from your total assets, the answer is your net worth. One hopes the answer will be a positive one. If your liabilities exceed your assets -- and this could happen -- you could be well along on the road to personal bankruptcy.
To develop your personal balance sheet, list all of your assets and their current net value. Your house, for example, can be set down on the asset side at the current market value less all seling expenses (real estate agency commission, transfer taxes, if any, finance points, prepayment penalty, etc.). On the liabilities side note the current loan principal outstanding. The difference is your equity and is part of your net worth.