Balance SheetYour personal Balance Sheet is an account of what you own and what you owe. It is an accounting of all your assets and all your liabilities. All businesses account for their assets and liabilities on a regular basis - and you should too. As you start your journey to financial freedom, you have to start with where you are currently. It is just like planning a journey from point A to point B. First you have to assess where point A really is. Your current Balance Sheet tells you what you have accumulated so far, both in terms of assets and liabilities. It also tells you what your options are going forward in terms of financial freedom. If you own underutilized assets, perhaps focusing on them and making them work more efficiently makes sense. If you are laden down with debt, your best move could be getting it under control first. Your AssetsLet us start with your assets. Assets are what you own, such as this typical list:
This accounting is best done soon after a calendar quarter has passed because that's when you get statements from accounts such as 401(k)s. Use the actual account value whenever available and your best guess when it is not. Your LiabilitiesThe other side of the coin is your liabilities. A typical list will include:
Net WorthOnce you have these two numbers, you can calculate your Net Worth as follows:Net Worth = Total Assets - Total Liabilities Thus Net Worth is nothing but a snapshot of your overall financial situation at a given time. Obviously it will change with time. As you accumulate assets, your Net Worth increases. If you take on debt, it decreases. Net Worth and IncomeClearly, your Net Worth and your income are two independent numbers and have no direct connection to one another. You may have lots of assets based on what you have saved up or even inherited, without having a lot of money coming in every month. In fact that is the central lesson of The Millionaire Next Door Automate Your Balance SheetI believe it is very important to automate your finances. There are many tools available online, such as Mint.com. Your bank or brokerage might also provide such tools to help you manage your money. Once you have all that information available, it is a piece of cake to generate your Balance Sheet.It is a very good idea to do it on a regular basis, such as the end of every calendar quarter. This information will come in very useful as you plan your journey to financial freedom.
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. By playing exceptional financial defense, these millionaires next door built up significant assets even without earning significant incomes! This is a key point to appreciate.
