There are some simple things that an individual can do to dramatically improve their chances to succeed financially. Good financial management requires a combination of knowledge, discipline, planning, organizing, monitoring and good decision making, at the least.
A manager’s success is often related to the quality of the information available to study and analyze. The more and better information available would logically enable a competent manager to better plan, organize, monitor and make strategic and tactical decisions.
I want to address one key area of financial analysis that every individual is capable of doing that may prove to be invaluable in their efforts toward personal financial management (I will address other areas in the future). For those that already do this, nice job, and I will assume you are reaping the benefits.
It is very important to create and maintain a personal balance sheet (net worth statement) on a periodic basis. A balance sheet is a schedule of assets, liabilities, and net worth. Since you are doing this for your own management purposes, there is no exact right way to do it. The first section should be a list of your assets and can be organized by type of asset. For example, sections for real estate, non-retirement investment and bank accounts, retirement accounts, autos, and other. Then a section for your liabilities. Finally, a line item for your net worth (or deficit) that is the difference between your assets and liabilities.
The balance sheet is a statement of your overall financial health. It serves many managerial purposes, but one that is often overlooked and underappreciated is simply the bigger picture perspective it can provide. For this reason, I believe it is very useful to prepare a balance sheet at regular intervals in the same way that businesses do. At a minimum, it should be prepared every December 31st. At every quarter-end is better (and preferred), and monthly may sometimes be best for those experiencing some near-term financial difficulty.
By creating a spreadsheet of your balance sheets side by side over time, in essence, a graph of your worth is easily tracked. Imagine your net worth as your personal stock price. By having a spreadsheet showing your value side by side you can see your personal chart. You can see trends and compare your value to past dates. You can also look at components of the balance sheet to see how different sections are doing. Are your retirement accounts increasing, are you paying down or increasing your debt? You can see how this information can be very useful.
One of the greatest benefits of tracking your balance sheets is for managing your investments. One of the most difficult parts of investing for most people is dealing with market declines. Especially those unexpected and violent corrections that can make us feel sick and afraid, and push us to want to sell our investments to alleviate our pain. And all too often a decision to sell in those corrections would be incorrect and not consistent with a long-term investment strategy.
It can be comforting during times of market correction to look at your balance sheet history to gain perspective. You may find that during big market corrections that your net worth is still more than it was say, just a year ago, or whatever the case may be. So in a moment when it feels like a fortune has been lost and you are going broke, you can see in perspective on a relative basis that things may not be as bad as they seem. Therefore, by tracking your balance sheets you may find comfort and perspective in market downturns that may help prevent making poorly timed emotionally-based decisions and may aid in sleeping at night during turbulent times.
While it may take a little time and effort initially to create a balance sheet listing of your assets and liabilities, it should be relatively easy to compile for each subsequent date. For most, it should only take 5 or 10 minutes to add current values to the balance sheet spreadsheet each period. And if you use computer software you don’t even have to do any calculations, just data entry. The time it takes to accomplish this should be very well rewarded with better financial decision making that will add to your bottom line worth, and greater peace of mind allowing you to stick with your long-term strategy.
