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Personal financial happiness is all about the balance – and I’m not just talking about the bank balance here!
With the ‘new’ year firmly under way and last year relegated to a mere hangover (financial or otherwise!) now is probably as good a time as any to start taking stock of our own personal finances. To do so we need to get ‘professional’ and take a leaf out of the nearest ‘business basics’ handbook.
One of the best ways to assess our own personal financial situation is to compile a personal finance balance sheet. Much like a real balance sheet (the kind used by big, small and medium-sized business) our personal finance model will also include listings of our own assets and liabilities.
Those unfamiliar with financial reports and the associated terminology have no reason to fear. A balance sheet is merely a statement that shows what we own, what we owe and the positive (or negative) difference between the two. The latter is officially known as our net worth.
However, unlike business balance sheets that would normally include plant and equipment as assets our own personal balance sheet would normally include our house, stocks and car (or cars). Similarly, while a traditional balance sheet would list accounts payable as liabilities in a personal balance sheet one would expect to find outstanding credit card debt, mortgages and loans. It is this net worth which is of interest. It determines whether we are in good or bad shape – financially speaking. In fact it is of such interest that simply typing the words net worth calculator into a search engine on the internet will throw up over a million results (though admittedly not all of them are personal finance related).
Some – like the one on CNN Money – does all the thinking for you. It allows the reader to punch in some basic financial information and then – with a simple click of the mouse – produces the calculation. It even includes a pie chart at the bottom of the page that shows a breakdown of households by net worth. Armed with all of this you could probably compare how your own net worth stacks up against the average American household – if you really want to. (However, do be aware that the figures in the chart that I saw were taken from 2003 data when the average household net worth was USD $100,894 – obviously this may well have changed since the advent of the global financial crisis). In addition be aware that everyone’s ideal net worth differs. There is no hard and fast rule or wrong and right amount. The number is based on an individual’s life goals and objectives. As with most things financial different people and different families have different needs based on everything from where you live to where your children go to school and how you plan to spend your retirement. No one size fits all!
Having said this, the real reason to calculate your net worth is to allow you to gauge whether you are indeed on the right financial track to meet those individual goals. And if you are on the right track regular monitoring using a personal finance balance sheet will help you to stay there.
Why is this important you may well ask? Well, for starters it will help you to live within your means. Although this sounds simplistic it has become blatantly obvious – in the wake of the global financial crisis – that this most basic advice has gone unheeded by too many for too long. As a result – as we often hear – the property foreclosure rate in the United States is soaring.
Another reason to keep an eye on your own net worth is to enable you to prioritize your payments and to practice that golden (but oh so hard to follow) rule of ‘paying yourself first’. Knowing what we earn and what we owe can certainly help in this regard. All too often many of us get carried away with the payments we have to make. They often take precedence over the money we hope to save. Instead of managing our debts properly – as a bona-fide business would – we pay our creditors first and ourselves last. This is where a balance sheet can help. It helps us to put in to practice the recommended rule of thumb that we pay to ourselves at least 10% of everything we earn.
And finally while the amount of each individual’s net worth may differ certain objectives must stay the same. One objective that we have in common is the need keep our net worth positive.
If your net worth is negative – with liabilities outweighing assets – then strive for a positive one by taking measures such as cutting spending. And if your net worth is positive then strive to keep it that way. Monitor it and maintain the momentum.
Remember ..a healthy balance sheet will often lead to a bigger bank account and ultimately a better life.
Good luck finding the balance.
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