This simple tool allows you to value, monitor and protect your assets -- and yourself.
Although I have an inbuilt loathing for management-speak and business proverbs, I'll always remember these wise words from one of my business mentors:
"If you can't measure it, you can't manage it."
I think that this saying is particularly fitting in the field of personal finance. In my view, if you're not measuring and monitoring your money at appropriate intervals, then you're not in control of it. In these circumstances, money is your master, not your slave.
Millions of us only go as far as keeping one eye on our household finances. We glance at our monthly bank statements to reassure ourselves that we've spent less than we've made. After all, if we've stayed in the black and out of the red for another month, then we've no immediate concerns, right?
On the other hand, being something of a numbers nerd or "Statto", I aim to keep a much closer watching brief on my money. Although I take care to balance my household budget each month, my main concern is keeping a close eye on the "big picture": my overall wealth.
In order to help me to meet my goals on the long road to riches and retirement, I built an Excel spreadsheet which provides me with a one-page summary of my personal 'balance sheet'. As my finances are intermingled with my wife's, I also keep a record of her assets on the same page. In addition, I have separate pages for my son and daughter, to keep everything in the family. (It will come as no surprise to habitual Fool readers to learn that my love of spreadsheets led me to acquire the nickname "Excel Man" in a previous job!)
The difficult part of creating a financial snapshot of this kind is populating your spreadsheet with the initial data. For me, this involved sifting through mountains of paper (think "piling, not filing") to find important documents and the latest valuations of various assets.
Of course, each person's "financial fingerprints" are unique, so no two spreadsheets of this kind will be alike. However, here are some ideas on what you may need to include in your wealth-watching summary. I've listed these entries in alphabetical order, though you may wish to group them by type:
Items to include in your personal balance sheet
Possible assets | Possible liabilities |
|---|---|
Art, antiques, jewellery and other valuables | Buy-to-let mortgages |
Cars/other vehicles | Car and personal loans |
Cash in other (company?) accounts | Credit and store cards |
Cash ISAs and TOISAs | Mortgages |
Company pensions | Overdrafts |
Current accounts | Secured loans/second mortgages |
Debts (money owed to you) | ...plus any other debts and financial IOUs |
Employer-operated share schemes and share options | |
Insurance-company bonds, corporate bonds and gilts | |
Managed funds and index trackers | |
Mortgage endowments | |
National Savings & Investment Products, including Premium Bonds | |
OEICs and unit trusts | |
Other forms of cash and cash equivalents (cashback on credit cards, etc.) | |
Private and Stakeholder pensions and SIPPs | |
Private-company shares | |
Privatisation shares | |
Properties (including buy-to-let) | |
Savings accounts | |
Share certificates | |
Share-dealing accounts | |
Shares ISAs and PEPs |
As I have no mortgage or other interest-bearing debts, the right-hand column of my personal balance sheet is empty, which is just the way I like it. However, to arrive at a figure for your net wealth, you need to subtract the total of the right-hand column from that of the left-hand column.
I haven't included household contents and other domestic goods in this list, largely because these goods are difficult to value and not necessarily easy to dispose of. Actually, I refer to my home as a "burglar's nightmare", because most of our domestic goods are at least a decade old and therefore would fetch very little when sold on!
One benefit of creating a balance sheet of this kind is that it helps you to unearth hidden treasures. For example, while creating my spreadsheet, I found a ten-year-old 'forgotten' PEP worth nearly £9,000, plus a small personal pension from fifteen years ago which I'd lost track of.
In addition, this spreadsheet allows you to see your personal "asset allocation". In other words, it shows what proportion of your wealth is tied up in the four main asset classes: bonds, cash, property and shares. As I no longer own a home, more than four-fifths (82%) of my wealth is tied up in the stock market, with the remainder in cash. Although exposure to this degree of stock-market risk would not be appropriate for most adults, I'm comfortable with my approach to wealth creation. Although I can see plenty of value in shares in individual companies, thanks to sky-high house prices, I expect poor future returns from property!
Another advantage of creating a personal balance sheet is that it makes life easier for your family when it comes to death and inheritance tax (IHT). Not only does this spreadsheet provide a comprehensive list of what you own, it also helps you to see how large your estate might be and, therefore, what steps you need to take to avoid IHT.
Of course, it's entirely up to you as to how often you update this at-a-glance view of your financial health. You can do it ad hoc (for example, as your latest statements arrive), or you can do it regularly, say, weekly, monthly, quarterly or even annually. The choice, as they say, is yours.
Finally, it's crucial to remember that your greatest asset is likely to be you, or, more accurately, your earning power. One rule of thumb is to multiply your pre-tax income by twenty to come up with a value for your "human capital". So, an income of, say, £30,000 a year translates into an asset worth £600,000. I bet you didn't think you were quite so valuable, did you? Hence, in this article, I explain how to safeguard your greatest asset, which should help you to sleep better at night.
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