How To Create a Personal Balance Sheet and Determine Net Worth

A balance sheet is a list of your assets, your liabilities, and what each item is currently worth so that you can calculate your net worth. The total assets minus the total liabilities equals your net worth. (I know this sounds like accounting jargon, but knowing your net worth is critical to your financial success.) 

Creating a balance sheet is easy. Just grab a pencil and a piece of paper. Computer-savvy individuals can accomplish the same task using spreadsheet software. Get all your financial documents, such as bank and brokerage statements and other such documents; you need the figures from these documents. 

In this article, I outline the steps you need to follow. Check your balance sheet at least once a year to monitor your financial progress (is your net worth going up or down?).

Step 1: List your assets in decreasing order of liquidity

Liquid assets aren’t references to beer or cola (unless you’re Anheuser- Busch). Instead, liquidity refers to how quickly you can convert a particular asset (something you own that has value) into cash. If you know the liquidity of your assets, including investments, you have some options when you need cash to buy some stock (or pay some bills). 

All too often, people are short on cash and have too much wealth tied up in illiquid investments such as real estate. Illiquid is just a fancy way of saying that you don’t have the immediate cash to meet a pressing need. (Hey, we’ve all had those moments!) Review your assets and take measures to ensure that enough of them are liquid (along with your illiquid assets).

Listing your assets in order of liquidity on your balance sheet gives you an immediate picture of which assets you can quickly convert to cash and which ones you can’t. If you need money now, you can see that cash in hand, your checking account, and your savings account are at the top of the list. The items last in order of liquidity become obvious; they’re things like real estate and other assets that can take a long time to convert to cash.

Selling real estate, even in a seller’s market, can take months. Investors who don’t have adequate liquid assets run the risk of having to sell assets quickly and possibly at a loss as they scramble to accumulate cash for their short-term financial obligations. For stock investors, this scramble may include prematurely selling stocks that they originally intended as long-term investments.

Table 1 shows a typical list of assets in order of liquidity. Use it as a guide for making your own asset list.

Table 1: Listing Personal Assets in Decreasing Order of Liquidity

Asset Item Market Value Annual Growth Rate %
Current assets    
Cash on hand and in checking $150  
Bank savings accounts and certificates of deposit $5,000 1%
Stocks $2,000 11%
Mutual funds $2,400 9%
Other assets (collectibles and so on) $240  
Total current assets $9,790  
Long-term assets    
Auto $1,800 –10%
Residence $150,000 5%
Real estate investment $125,000 6%
Personal stuff (such as jewelry) $4,000  
Total long-term assets $280,800  
Total assets $290,590  

Here’s how to break down the information in Table 1:

The first column describes the asset. You can quickly convert current assets to cash — they’re more liquid; long-term assets have value, but you can’t necessarily convert them to cash quickly — they aren’t very liquid.

Note: I have stocks listed as short-term in the table. The reason is that this balance sheet is meant to list items in order of liquidity. Liquidity is best embodied in the question, “How quickly can I turn this asset into cash?” Because a stock can be sold and converted to cash very quickly, it’s a good example of a liquid asset. (However, that’s not the main purpose for buying stocks.)

The second column gives the current market value for that item. Keep in mind that this value isn’t the purchase price or original value; it’s the amount you’d realistically get if you sold the asset in the current market at that moment.

The third column tells you how well that investment is doing compared to one year ago. If the percentage rate is 5 percent, that item is worth 5 percent more today than it was a year ago. You need to know how well all your assets are doing. Why? So you can adjust your assets for maximum growth or get rid of assets that are losing money. You should keep assets that are doing well (and you should consider increasing your holdings in these assets) and scrutinize assets that are down in value to see whether they’re candidates for removal. Perhaps you can sell them and reinvest the money elsewhere. In addition, the realized loss has tax benefits.

Figuring the annual growth rate (in the third column) as a percentage isn’t difficult. Say that you buy 100 shares of the stock Gro-A-Lot Corp. (GAL), and its market value on December 31, 2014, is $50 per share for a total market value of $5,000 (100 shares multiplied by $50 per share). When you check its value on December 31, 2015, you find out that the stock is at $60 per share for a total market value of $6,000 (100 shares multiplied by $60). The annual growth rate is 20 percent. You calculate this percentage by taking the amount of the gain ($60 per share less $50 per share = $10 gain per share), which is $1,000 (100 shares times the $10 gain), and dividing it by the value at the beginning of the time period ($5,000). In this case, you get 20 percent ($1,000 divided by $5,000).

What if GAL also generates a dividend of $2 per share during that period — now what? In that case, GAL generates a total return of 24 percent. To calculate the total return, add the appreciation ($10 per share multiplied by 100 shares = $1,000) and the dividend income ($2 per share multiplied by 100 shares = $200) and divide that sum ($1,000 plus $200, or $1,200) by the value at the beginning of the year ($50 per share multiplied by 100 shares, or $5,000). The total return is $1,200 on the $5,000 market value, or 24 percent.

The last line lists the total for all the assets and their current market value.

Step 2: List your liabilities

Liabilities are simply the bills that you’re obligated to pay. Whether it’s a credit card bill or a mortgage payment, a liability is an amount of money you have to pay back eventually (usually with interest). If you don’t keep track of your liabilities, you may end up thinking that you have more money than you really do.

Table 2 lists some common liabilities. Use it as a model when you list your own. You should list the liabilities according to how soon you need to pay them. Credit card balances tend to be short-term obligations, whereas mortgages are long-term.

Liabilities Amount PayingRate%
Credit cards $4000 18%
Personal loans $13,000 10%
Mortgage $100,000 4%
Total Liabilities $117,000  

Here’s a summary of the information in Table 2:

The first column names the type of debt. Don’t forget to include student loans and auto loans if you have them. Never avoid listing a liability because you’re embarrassed to see how much you really owe. Be honest with yourself — doing so helps you improve your financial health.

The second column shows the current value (or current balance) of your liabilities. List the most current balance to see where you stand with your creditors.

The third column reflects how much interest you’re paying for carrying that debt. This information is an important reminder about how debt can be a wealth zapper. Credit card debt can have an interest rate of 18 percent or more, and to add insult to injury, it isn’t even tax-deductible. Using a credit card to make even a small purchase cost you if you don’t pay off the balance each month. Within a year, a $50 sweater at 18 percent costs $59 when you add in the annual potential interest on the $50 you paid.

If you compare your liabilities in Table 2 and your personal assets in Table 1, you may find opportunities to reduce the amount you pay for interest. Say, for example, that you pay 18 percent on a credit card balance of $4,000 but also have a personal asset of $5,000 in a bank savings account that’s earning 2 percent in interest. 

In that case, you may want to consider taking $4,000 out of the savings account to pay off the credit card balance. Doing so saves you $640; the $4,000 in the bank was earning only $80 (2 percent of $4,000), while you were paying $720 on the credit card balance (18 percent of $4,000).

If you can’t pay off high-interest debt, at least look for ways to minimize the cost of carrying the debt. The most obvious ways include the following:

Replace high-interest cards with low-interest cards. Many companies offer incentives to consumers, including signing up for cards with favorable rates (recently under 10 percent) that can be used to pay off high-interest cards (typically 12 to 18 percent or higher).

Replace unsecured debt with secured debt. Credit cards and personal loans are unsecured (you haven’t put up any collateral or other asset to secure the debt); therefore, they have higher interest rates because this type of debt is considered riskier for the creditor. Sources of secured debt (such as home equity line accounts and brokerage accounts) provide you with a means to replace your high-interest debt with lower-interest debt. You get lower interest rates with secured debt because it’s less risky for the creditor — the debt is backed up by collateral (your home or your stocks). Learn more about how to get out of credit card debts.

Replace variable-interest debt with fixed-interest debt. Think about how homeowners got blindsided when their monthly payments on adjustable-rate mortgages went up drastically in the wake of the housing bubble that popped during 2005–2008. If you can’t lower your debt, at least make it fixed and predictable.

Make a diligent effort to control and reduce your debt; otherwise, the debt can become too burdensome. If you don’t control it, you may have to sell your stocks just to stay liquid. Remember, Murphy’s Law states that you will sell your stock at the worst possible moment! Don’t go there.

Step 3: Calculate your net worth

Your net worth is an indication of your total wealth. You can calculate your net worth with this basic equation: total assets (Table 1) less total liabilities (Table 2) equal net worth (net assets or net equity).

Table 3 shows this equation in action with a net worth of $173,590 — a very respectable number. For many investors, just being in a position where assets exceed liabilities (a positive net worth) is great news. Use Table 3 as a model to analyze your own financial situation. Your mission (if you choose to accept it — and you should) is to ensure that your net worth increases from year to year as you progress toward your financial goals.

Table 3: Figuring Your Personal Net Worth

Totals Amounts Increase from Year Before
Total assets (from Table 1) $290,590 +5%
Total liabilities (from Table 2) ($117,000) -2%
Net worth (total assets less total liabilities) $173,590 +3%

Step 4: Analyze your balance sheet

After you create a balance sheet (based on the steps in the preceding sections) to illustrate your current finances, take a close look at it and try to identify any changes you can make to increase your wealth. Sometimes, reaching your financial goals can be as simple as refocusing the items on your balance sheet (use Table 3 as a general guideline). Here are some brief points to consider.

Is the money in your emergency (or rainy day) fund sitting in an ultrasafe account and earning the highest interest available? Bank money market accounts or money market funds are recommended. The safest type of account is a U.S. Treasury money market fund. Banks are backed by the Federal Deposit Insurance Corporation (FDIC), while U.S. Treasury securities are backed by the “full faith and credit” of the federal government.

Can you replace depreciating assets with appreciating assets? Say that you have two stereo systems. Why not sell one and invest the proceeds? You may say, “But I bought that unit two years ago for $500, and if I sell it now, I’ll get only $300.” That’s your choice. You need to decide what helps your financial situation more — a $500 item that keeps shrinking in value (a depreciating asset) or $300 that can grow in value when invested (an appreciating asset).

Can you replace low-yield investments with high-yield investments? Maybe you have $5,000 in a bank certificate of deposit (CD) earning 3 percent. You can certainly shop around for a better rate at another bank, but you can also seek alternatives that can offer a higher yield, such as U.S. savings bonds or short-term bond funds. Just keep in mind that if you already have a CD and you withdraw the funds before it matures, you may face a penalty (such as losing some interest).

Can you pay off any high-interest debt with funds from low-interest assets? If, for example, you have $5,000 earning 2 percent in a taxable bank account and you have $2,500 on a credit card charging 18 percent (which is not tax-deductible), you may as well pay off the credit card balance and save on the interest.

If you’re carrying debt, are you using that money for an investment return that’s greater than the interest you’re paying? Carrying a loan with an interest rate of 8 percent is acceptable if that borrowed money is yielding more than 8 percent elsewhere. Suppose that you have $6,000 in cash in a brokerage account. If you qualify, you can actually make a stock purchase greater than $6,000 by using margin (essentially a loan from the broker). You can buy $12,000 of stock using your $6,000 in cash, with the remainder financed by the broker. Of course, you pay interest on that margin loan. But what if the interest rate is 6 percent and the stock you’re about to invest in has a dividend that yields 9 percent? In that case, the dividend can help you pay off the margin loan, and you keep the additional income.

Can you sell any personal stuff for cash? You can replace unproductive assets with cash from garage sales and auction websites.

Can you use your home equity to pay off consumer debt? Borrowing against your home has more favorable interest rates, and this interest is still tax-deductible.

Paying off consumer debt by using funds borrowed against your home is a great way to wipe the slate clean. What a relief to get rid of your credit card balances! Just don’t turn around and run up the consumer debt again. You can get overburdened and experience financial ruin (not to mention homelessness). Not a pretty picture.

The important point to remember is that you can take control of your finances with discipline.

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