If you learn a little bit about investing in stocks, you'll
learn that publicly traded companies in the U.S. are required to
offer financial statements each quarter, revealing their health
and recent results. We individuals would also do well to prepare
that kind of document -- a
financial statement -- that will give us an eye-opening view of
our financial health.
This is not a revolutionary idea. As entrepreneurs and others
know, if you're looking to borrow money for a small business,
you'll typically need to prepare a personal financial statement
for lenders to review. But even salaried folks can benefit from
preparing a personal financial statement.
Your balance sheet
The most fitting financial statement to model your personal
financial statement after is the balance sheet. It reflects a
company's financial health at a single point in time and sets
shareholders' equity equal to assets minus liabilities. In other
words, shareholders can lay claim to whatever is left over after
what is owed has been subtracted from what is owned.
Similarly, in your personal financial statement, you'll see
that your personal net worth is simply all your assets less your
debts. Here's how you might go about it:
- Total your assets, which include: cash, the value of
savings and checking accounts, stocks, bonds, CDs, retirement
funds, and so on. Add in any equity value for your home, plus
the value of your belongings (car, furniture, music collection,
clothes, jewelry, board games, etc.). Include the cash
surrender value of any insurance policies, any funds owed to
you, and any other assets you can think of.
- Total your liabilities next. These include the remaining
debt on your mortgage, as well as car loans, student loans,
credit card debt, and so on. If you know you owe a certain sum
in taxes, include that. If you owe your uncle or best friend
some money, include that, as well.
- Subtract your liabilities from your assets, and
-- you're looking at your net worth. Preparing a personal
financial statement can give you an idea of
how healthy your finances are.
If you don't like the picture you see, know that
you can change it
you can change it, over time -- especially if you have a lot of
If you have $50,000 socked away in a brokerage account, it can
grow to more than $330,000 over 20 years if it averages 10%
annually. If you want more than that or don't have $50,000 socked
away, you can start saving and investing now.
You can also plump up your net worth over time by
spending less, taking on some extra work, and delaying your
retirement by a few years.
Don't just guess about your financial health and your
financial future. Take some time to assess your situation --
perhaps by starting with a personal financial statement -- and
a retirement plan
a retirement plan to get you where you want to be.
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