The Value of a Balance Sheet

By Scott A. Rojas, MBA, CFP®

At Eclectic Associates, we believe that getting a look at a client’s entire financial picture, not just their retirement and brokerage accounts, guides us in making sound and well-informed decisions for our clients.  Not only is it important for us to have a holistic view of a client’s overall wealth, but there are many times when a client does not yet have a grasp of their own true net worth.

Before being able to make investment recommendations and run retirement projections, we must have an accurate starting point.  That’s why a balance sheet is the first page of our financial plan for new clients; it helps to get us both on the same page.

What is a Balance Sheet?

A personal balance sheet (also called a net worth statement) is a financial statement that shows your assets, liabilities, and net worth at a specific point in time.  It provides an overview of your financial position and is a useful tool for evaluating your financial well-being.  While having a professional build one is helpful, you can put this together for yourself as well.

Here's how:

1. Compile a list of your assets, which could include:

- Savings and checking accounts
- Investment and retirement accounts
- Property, such as cars, trailers, and real estate
- Personal possessions, such as family heirlooms or engagement rings.  Depending on the asset, it might make sense to get it appraised.

2. List your liabilities.  This is not as enjoyable, but it is almost more important to get this information listed correctly than your list of assets.  You need to know what you owe and the interest rate you are paying.  Liabilities could include mortgages on primary residences or rental properties, personal loans, credit card balances, car loans, etc.

3. Calculating your net worth is then a simple subtraction problem: the total balance of your assets minus the total balance of your liabilities.

Once you have completed this process, you now have a snapshot of your financial health.  This can be a useful tool for deciding what your investment allocation should look like, tracking your progress toward financial independence, and identifying areas that may need some extra attention.  

Next Steps

We recommend that you update your balance sheet at least annually.  Our clients receive their latest balance sheet once per year, when we ask them to update their assets and liabilities.  By doing so, we continue to have an accurate and comprehensive picture, which allows us to provide the best guidance and management possible.  But even if you manage your own finances, a balance sheet will help you be better informed and make better decisions.

If you would like help building your own net worth statement, please make an appointment with one of our financial advisors.