*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
When I started business school pursuing my MBA, I was taking an accounting course geared toward financial analysis. One of the most important tools used is a balance sheet. A balance sheet is used to track assets, liabilities and owner's equity.
Being in business school means that you are not living a lifestyle that is of the rich and famous. Actually, I struggled financially because it was the first time I was living with much more than I earned. I had always kept a budget of my expenses and knew where my money was going, but the balance sheet helped me keep track of the big picture of my finances. To this day, I track my balance sheet monthly.
Keeping Track Of My Assets
Your assets are a collection of what you own. For instance, I do not own a home, but I own checking accounts, a retirement account, a vehicle and some other valuables, such as my computer and wardrobe.
Keeping track of these assets on a monthly basis forces me to analyze what I am doing with my finances. For instance, I have to read my bank statements for both my checking accounts and retirement accounts. Doing this shows me if I am overspending and what I can do to limit or eliminate my expenses in running a checking account. Checking my retirement accounts requires me to continually track the long-term goal of retirement.
Tracking the value of a vehicle is useful due to the possibility that it can be damaged or destroyed. I may also need to get a new vehicle if my circumstances change. Doing this allows me to have the best standing if I need to shop for auto insurance, make a claim on my vehicle or sell it. I track the value at websites such as Kelley Blue Book, Yahoo! Autos and Edmunds.
Valuing other valuables such as my wardrobe and computers are easy to value. I can always check shopping websites and search engines to track the replacement costs of these valuables.
Keeping Track Of My Liabilities/Debts
I had to borrow student loan funds and credit lines to help subsidize my room and board, transportation and other living expenses while I was a student. I needed to keep a tally of how my expenses were growing over time, not just a short-term plan. It also allows me to focus on paying down the debt, since the cost of servicing my debt is better served to grow my assets, for instance.
Tracking the costs of my debts are easy, since most lenders make it easy to get balances on websites. For instance, student loans can be tracked through the National Student Loan Data System.
Now I able to track all of my debts in one place and I have a better way to view all of my debts. The balance sheet is a great tool that allows me to track the debt over time to see if it is decreasing at a rate where I can improve.
There are other liabilities that I have such as insurance, but I do not place those here, because they do not have value unless I make a claim.
Owner's Equity On a Balance Sheet, Net Worth On My Balance Sheet
On my balance sheet, I do not keep owner's equity, instead, I keep a net worth. This is derived from the difference of the value of my assets and the value of my debts. That number can be positive or negative, however, this is the number that I try to keep positive. This is the most important number to me for that reason. This is the best long-term measure of my financial success.
There are no comments yet