Your household balance sheet: Keeping track of what you own and what you owe

The balance sheet. That’s the realm of accountants, stock analysts, and C-suite executives, right? Actually, if you have your own household budget and some assets in your name, the balance sheet is just as relevant to your personal finances as it is to the pros.

A balance sheet is a financial statement that shows what you own and what you owe, as of a certain point in time. The difference between how much you owe and how much you own is your net worth (or “owners’ equity”). Things you own are called assets. Things you owe are called liabilities. On the balance sheet, this equation must always be in balance (hence the name):

Assets – liabilities = equity

In household finance terms, “equity” is your net worth. To calculate (and track) your net worth, you need to tally up your assets and liabilities.

#1: Totaling your assets

Assets are things that you own because you bought them, earned them, or inherited them. In the U.S., assets are listed on a balance sheet with the most liquid items (i.e., those that are easiest to sell) listed first and longer-term assets listed lower down.

• Cash and cash equivalents. Cash includes physical cash in your wallet (and in the safe behind the picture frame in your home). This category also includes the balances in checking and savings accounts and certificates of deposit (CDs).
• Accounts receivable. If someone owes you money, this is called “accounts receivable” (A/R) on your books. A/R is an asset because someday when you collect what’s owed to you, the amount will turn into cash.
• Inventory. If you have a home business or a side hustle that involves selling things you make or purchase, you may have an inventory of items on hand that you will later send to customers in exchange for payment.
• Fixed assets. Fixed assets include items such as furniture, electronics, and vehicles. These items could be sold in case you or your business needs cash, but ideally you want to keep them. As fixed assets age, they slowly lose their value. That’s called depreciation, and if you’re tracking your assets on a balance sheet, you would need to periodically subtract accumulated depreciation from the value of fixed assets.
• Investments. Investments—including the money in your 401(k) and other retirement accounts—might include stocks, exchange-traded funds (ETFs), mutual funds, and/or bonds. (Typically, investments are held for more than a year. If an investment will be sold within the current year, it belongs under “cash” on the balance sheet, and is then called a “marketable security.”)
• Land and buildings: You might own your house and land, or a vacation home. Land is not depreciated on a balance sheet, although buildings are.

#2: Totaling your liabilities

Liabilities are amounts you owe to someone else, either immediately or over a long period. One way to obtain an expensive asset is by taking out a loan (e.g., a home mortgage) to pay for it; the loan increases your liabilities.

Current liabilities are owed within a year and might include:

• Accounts payable. If you have received your electricity bill and haven’t paid it yet, this means you have “accounts payable” (A/P).
• Credit card debt. If you purchase items with your credit card, you have to pay that credit card balance at a later time.

Noncurrent liabilities are items owed over several years and might include student loan debt, a mortgage, or a car loan or lease.

#3: Calculating your net worth

On a personal balance sheet, add up your assets and subtract your liabilities. The result is your net worth, which is also called equity.

For example, suppose you have:

• $5,000 in cash (asset)
• $20,000 in your 401(k) account (asset)
• A car with a depreciated value of $22,000 (asset), but with an $18,000 auto loan balance (liability)
• A $400,000 house (asset) with an amortized balance of $300,000 on the mortgage (liability)
• A $3,000 balance on your credit card (liability)

Remember the net worth formula: Assets – liabilities = net worth.

In this example, you’d have $447,000 in assets ($5,000 + $20,000 + $22,000 + $400,000). You’d have $321,000 in liabilities ($18,000 + $300,000 + $3,000).

So your net worth would be $447,000 – $321,000 = $126,000.

When you’re first starting out, you might have a negative net worth (particularly if you finished college with student loans). And anytime you borrow money but don’t have enough assets to cover the debt, your net worth will get even more negative. For example, if you charge services (e.g., a haircut or your phone bill) or consumable goods (restaurant meals, coffees out, clothes) on your credit card, you’ll have purchased no assets, but now you have the liability of the credit card bill.

For that reason, some financial advisors suggest using credit only to buy assets (rather than services or consumable goods) such as cars, homes, and other expensive items, as you’ll have an asset to balance the liability. If you want to use a credit card to capture rewards or build your credit, consider charging only items that you can pay off at the end of each month.

The bottom line

When you first strike out on your own, your personal balance sheet might leave you with a negative net worth. If you spend too much money on credit for services and consumable goods, you may exacerbate the issue.

As you begin to save money and put away more for retirement, your net worth will increase. And if you purchase a car and possibly some real estate, those items will show on your personal balance sheet as assets. If you owe money on those items, the liabilities need to be recorded on your balance sheet as well, so make sure a given asset is worth more than the debt you owe on it.

It’s a smart idea to track your net worth each year. As time goes by, pay off those liabilities and aim to grow the asset side more than the liability side. According to the balance sheet math, that’s how you raise your net worth.