Tools for Financial Planning & Balance Sheet

By Charles P. Buck CFP™

At this time of the year we often think about what resolutions we will make for next year.  Fitness and Finances are the top two every year.  Everyone knows that before you embark on a new fitness program you should consult with a physician to make sure there are no hidden physical problems. I feel the same assessment should be done with your finances as well.

One tool to use is a Balance Sheet; which is a listing of your Assets, such as the car, house, mutual funds, cash, etc.  Opposite that is a listing of your Liabilities; these are the debts you owe to the bank, mortgage, credit cards, etc.  The difference is your Net Worth.  I have our Balance Sheet on Excel and update it quarterly to see what progress has been made on our financial journey.

A properly constructed Balance Sheet should be laid out so the Cash Items are listed first, the Investment Assets second, and the Personal Use Assets last.   The Liabilities are listed with the current assets, usually less than a year, and long-term assets next.  If your assets are all personal use assets, you are consuming your assets, rather that growing them.

Analysis of your Balance Sheet will yield a wealth of Information and Insight about your fiscal condition.  Start with the Current Ratio, short term assets divided by the short term liabilities.  To be healthy, the current ratio should be between one and two.  A healthy Current Ratio will enable you to sustain disruptions in income or emergency expenses.

On the debt side, your Total Payments Ratio, total payments on all debt divided by your gross income, should be no more than 36%.  The Housing Payments ratio, principal, taxes, interest and insurance, should be less than 28%. 

By developing a Balance Sheet you can determine your fiscal health, and this report will be a good tracking tool as you work to improve your fiscal condition.