Last week I laid out what it takes to get a plan together. Let’s start breaking it down and getting a little more detailed about each piece. I don’t want to be overwhelming, so we’ll focus on one topic per post.
The Balance Sheet
Why in the world would a household need a balance sheet? That’s something for businesses. Well, need may not be the correct word. Want may be more appropriate in this case. I want to see what I have that’s working for me and what’s costing me money. Having a reference handy each month keeps me up to date.
Balance sheets are quite simple. It’s a method of tracking our assets and liabilities. Now, these two concepts were something I was never taught growing up. I had a vague idea that an asset was something you owned that had value, like a house. Liabilities were also foreign to me. I thought of that as simply debts owed.
I think about it a little differently now. It’s still pretty simple, but I have a clearer understanding.
Assets
These are the things we own that can be used to generate income. For example, I could list a piece of jewelry as an asset since it can be sold to generate income. However, that’s not the best type of asset to have. I want to generate regular income from assets so I look to investments such as stocks, bonds, rental properties, or a even business. These types of assets can be grown over time and potentially generate enough income to cover my cost of living.
Liabilities
Those debts or obligations we owe that cost money every month are liabilities. Loans and credit cards are probably the most common.
Adding it Up
So all we have to do now is take the total of our liabilities and subtract it from the total of our assets and bingo… Net Worth. Easy Peasy. There are some good templates for this in Google Sheets.
*The Home as an Asset
There’s a lot of talk about home ownership being a major investment. In my case, I consider it more of a liability since I still have a mortgage on it and it costs me money every month from maintenance costs. We bought late in 2009 and our estimated value has only come above what we paid in the last couple of months. If I calculate all of the interest paid on the loan (and ignore maintenance costs), I’m still about $40k in the red if I sold at today’s estimated value. That’s a terrible return on investment for the time held. Of course, it’s not a loss until you sell 🙂
Cheers!
-cb3