One of the best tools I found for managing household finances is a tool that investors use to analyze large corporations, banks use for deciding whether or not to lend to companies as well as individuals. In face, you most likely filled out one of these when you obtained your home mortgage. It’s called a balance sheet.
Let’s take a minute and pretend you are CFO of a corporation… oh wait, you are! Your family. Whether you’re a household of one or ten, you have to look at finances like you’re a CFO. The best place to do this is through the balance sheet.
The balance sheet is the tool used to determine your net worth. In a nutshell, your personal balance sheet adds up the value of all the things you own; house, cars, gun collections, sports memorabilia, antique pianos, retirement and savings accounts, etc, and subtracts the debts or liabilities you have outstanding; you mortgage, car loans, credit cards, student loans, etc. The difference between these two numbers is what we call your “Net Worth”. The end goal in the money game is to have enough of a net worth at retirement to be able to retire and live comfortably. If you do a really good job, you may even leave some assets for your beneficiaries to inherit.
Now, a couple of examples may be useful here. Let look at a home purchase first. If you purchase a $250,000 home, but you have a mortgage of $200,000, you have a positive affect on your net worth of $50,000. Once you pay off the mortgage, you’ll have a positive value of $250,000 towards your net worth. If you buy a car for $15,000 and finance the whole purchase, chances are you’ll owe more on your car than you could sell it for, and thus, you have created a negative effect on your net worth. Again, the end goal is to improve net worth enough so you can eventually retire. Credit cards can be detrimental to net worth, as they usually have no real asset tied to the debt.
In our free 52 week program, we offer a simple and easy to use worksheet to quickly determine your “Net Worth”, a snapshot of your personal finances. We hope that it helps guide you in making wise financial decisions and gives you a better shot at the retirement you’re hoping to enjoy.