4-Step Process To Build a Personal Balance Sheet in 15 Minutes or Less
4-Step Process To Build a Personal Balance Sheet in 15 Minutes or Less
Avoid Costly Mistakes: The Role of a Personal Balance Sheet in Real Estate Investing
Happy Thursday, fellow Hybrids!
Today, we’ll review one of the essential tools to keep in your financial toolkit: the Personal Balance Sheet.
You’ll walk away with step-by-step instructions to build a Personal Balance Sheet in 15 minutes or less.
(Today’s issue takes ~2.5 minutes to read)
As a real estate investor, it's crucial to have a clear understanding of your financial position.
One tool that can help you achieve this is a Personal Balance Sheet.
Put simply, a Personal Balance Sheet is a document that lists your assets, liabilities, and net worth.
Every real estate investor needs to have a Personal Balance Sheet for the following reasons:
By seeing your assets and liabilities in one place, you can get a clear picture of your financial health.
Knowing your net worth can help determine how much you can afford to invest in a particular property.
Supports loan and credit applications: When applying for loans or credit, lenders may ask for a personal balance sheet to assess your creditworthiness and financial health.
To create a Personal Balance Sheet, you'll need to list all of your assets and liabilities and calculate your net worth.
Here are 4 simple steps to build & maintain a Personal Balance Sheet in 15 minutes or less:
(Follow along by pulling up this Charles Schwab Personal Net Worth Worksheet in another tab)
1. List all your assets
Write down everything you own that has value.
Common examples include:
Money in your bank & brokerage accounts
Your car
Your primary home
Your rental properties (if applicable)
Retirement account balances
Other personal property
Use the full market value of all assets, even if you have a loan payment. We’ll subtract those in step 2.
2. List all your liabilities
Write down everything you owe to others. For loans, use the full loan balance, not the monthly payment.
Examples include:
Mortgage(s)
Car loan(s)
Credit card balance(s)
Student loans
Unpaid taxes
Make sure you spend an appropriate amount of time on this step, so you don’t miss anything.
3. Calculate your net worth
Net worth = Total value of assets − Total value of liabilities
To understand the concept of net worth, think of it this way:
If you could magically convert all the stuff you own and control—your investments, your house, your car, and all your other belongings—into its cash value and then use that cash to pay off all your debts, how much money would you have left?
Ideally, you’ll come up with a positive number, BUT don’t fret if you have a negative net worth to start.
Negative net worth doesn’t necessarily indicate that you are financially irresponsible; it just means that—right now—you have more liabilities than assets.
Knowing where you stand is the first step to taking informed action.
4. Keep it up-to-date:
Update regularly to track progress. I highly recommend you do this monthly.
Remember, net worth is a “moment in time” metric. Your income, expenses, and investment performance can fluctuate significantly over time.
Free sites like Mint or Empower (formerly known as Personal Capital) allow you to sync most bank accounts automatically.
I hope you’ll consider maintaining a Personal Balance Sheet as part of your financial hygiene.
Investors who make decisions based on inaccurate financial information have suffered costly mistakes.
It will take you ~15 minutes per month. If this exercise saves you from making even ONE bad decision, it will be well worth the time.
See you next week.
-Aaron