Those who know that I’m a CPA will occasionally ask me a financial question or two. If it’s an objective question, such as how much is the standard deduction for a married couple this year, I answer directly. It’s $24,400 for 2019 by the way. For many other questions such as what should I do with my tax refund or where’s the best place to invest my money these days, my default response is always the same: it depends.
The reason is that not everyone has the same financial situation with the same goals and the same needs. Everyone’s financial picture is unique. What is true for me may certainly not be true for you, and vice versa. Also, things are not always what they appear to be. I may appear to be doing very well financially but in reality I may very well be, as they say in Texas, “big hat, no cattle.” Or, my modest spending habits may suggest that I have limited means when, in fact, I am financially independent.
Further complicating matters is the fact that our personal finances are probably the most secretive thing about us. I am much more likely to share my medical statistics or other deeply personal information with you than how much is in my bank account or how much I owe on my credit cards. This is usually because we are insecure about our financial knowledge or just plain embarrassed about our financial situation. We have a natural tendency to compare ourselves to others – to equate our financial net worth with our personal self-worth – and we’re reluctant to appear weak.
If you don’t share a few personal financial details with me, however, I can’t really give you good advice about what to do with your money. In the financial arena, one size does not fit all. What our parents or coworkers or neighbors do with their money not only does not apply to you and me because our finances are different, but may not even be working for them.
How we manage our financial affairs depends on how much money we’ve saved, how much consumer debt we have, how well we’ve protected our assets, how many children we have, our job security, and so on. No one on a web site, or in a magazine, or at a backyard barbecue can give us any advice about our unique money management unless they are as familiar with our financial condition as our doctor is with our medical history.
Many of us though, lack basic knowledge about our own financial condition. We collect paycheck after paycheck, put some money aside, buy a few things with our credit cards and think about what’s coming up in the future. But very few of us actually take stock of our financial condition on a regular basis. We’re very familiar with the weeds but we don’t have a very good view of the big picture.
Any financial advisor will tell us that the first step in a sound financial plan is preparing a statement of financial position, a balance sheet, that details all of our financial assets and liabilities. This statement also calculates our net worth, which is a term that I’m not overly fond of. Many of us, consciously or not, equate our financial worth with our self-worth and the term “net worth” simply reinforces this erroneous view. We are much more than the net sum of what we own and what we owe. In business the balance sheet is called the Statement of Net Position and, while the term net worth is a standard one used in commerce, I prefer the term Net Position when putting together a balance sheet for individuals, especially if it’s for our own use.
It isn’t very difficult to construct a balance sheet. In a nutshell, we list the current market value of everything we own, and subtract the current principal amount of everything we owe. The difference is our net position. Much of the information — for cash, investments and liabilities — is available from our most recent banking, credit card and mortgage statements, or can be gathered from online sources. For items such as furnishings and jewelry, we need to estimate their current market value.
Sample worksheets in Microsoft Excel and Adobe Acrobat formats are included at the end of this article. For those who are not spreadsheet-oriented or do not have a copy of Microsoft Excel available, the Adobe Acrobat pdf version serves as a useful guide. It’s important to note that financial and accounting standards apply when assembling personal financial statements for outside parties. The sample spreadsheets included here are simplified versions intended to kickoff financial planning and do not conform to these standards.
We will explore the individual components of the balance sheet in future articles. For now, listing the current market value of all assets and the principal balance of all liabilities is enough to calculate net worth, or net financial position. Regardless of what we call the bottom line, not only can the net sum of our assets and liabilities be eye-opening for us, but the very exercise of putting together a balance sheet can be an enlightening experience.