[MUSIC] Planning for your financial future requires knowing where you are now? And there's a tool that can really be helpful in kind of determining and accessing your current financial situation. And this is called the personal balance sheet. It's a resource that you can use today and then continue to use throughout your lifetime and can be very valuable in that way. Let's take a look at what makes up a personal balance sheet. So a personal balance sheet is really useful because it's a snapshot, just a picture of your financial situation on a particular day and time. And it's really an example of where you are both in terms of how much you owe and how much you own and a way to look at that. What I like to do, is I like to do a personal balance sheet once a year. And then, I can see my progress over time and we can go ahead and look at it and calculate out our net worth. In fact, sometimes a personal balance sheet is called a net worth statement. So what do we mean by Net Worth? Your Net Worth is really your assets. Everything you own in life, minus your liabilities, everything you might owe somebody else. When we subtract out your liabilities from your assets, then what we have is your Net Worth. And obviously, we want to see our Net Worth grow over time. Now, when we're going ahead and working on our balance sheet and calculating our Net Worth, you need to put down the market value of something. So we're not talking about what you might have paid for it or what you would have hoped to sell it for, but truly the market value. And what this formula does, it assumes that if you converted all your things and your assets into cash. And then paid all of your debts, what would have left that net worth is really the cash that you would have left. So let's take a look at this a little more closely. What are assets? What would we include in this? And that really the first step in doing your personal balance sheet, is to make a list of your assets. I think it's helpful to kind of think about it in different categories and that kind of leads you through the process. The first category would be what we might call Monetary Assets. So things that are really practically in cash already, if not already, actually like the cash in your wallet. So, but it can also be things like your checking and savings account balances. So, or maybe a friend owes you money. Those type of things that are very liquid, really ready to go. The next thing is what we would think of this Tangible Assets. Things that you can put your hands on and hold. Personal property such as vehicles, like a car or a bike or a boat, your furniture. Maybe you have a computer, clothing, if you own a home. Tools, musical instruments, really, other things you think of as sort of big cost items that add up. Now remember, its market value is not what you paid for but what you could sell it for, and those can be very different. The last category, is what we call Investment Assets. And these are typically things that are in forms that are growing for you investing like stocks, bonds, mutual funds, It could be real estate, or property on real estate. Retirement accounts, such as employer sponsored retirement accounts and life insurance, but really only the cash value of it. Not what it would pay out if you were to die, so just what you could pull out of it. It says again, thinking about what are your assets? What do you have in cash? Your monetary assets, what are your big dollar amounts of personal property, those tangible things and investment assets. The next kind of flip side of this formula is your liabilities, the debts that you owe. And again, I like to break them out in the categories to help me think it through. And first thing I think about is kind of those current bills, credit card account balances that you might have. If you've had unpaid services, you went to the dentist and you haven't paid that bill yet but you know you owe it to somebody. Maybe you've borrowed money from other people, maybe you have passed rental utilities or any other bills that you've received that just haven't gotten around to paying for those are just money that you owe somebody. Probably, what might be a bigger category in terms of dollars amounts would be what we call long-term liabilities. And these include items like car loans, college loans or student loans for education, home mortgages or other real estate type mortgages. And those can definitely add up. Now, remember the amount that you want to put down on your balance sheet is the current value of a debt. So let's say for example that you went out and you borrowed $20,000 for a car loan but you've been paying on that. You would need to look up to find out how much do you currently own. So if you'd already paid back $5,000, then you may only own right now 15,000 and that's what will go on your balance sheet. Let's take an example and look at what somebody's balance sheet might actually look at. Joe has just graduated from collage, he plans to start a new job in a month. But before he starts working, he thinks he'd like to have a really a good picture, remember a snapshot, of what his assets and liabilities look right now. And he wants to calculate out his Net Worth, so he starts out by listing his assets everything from his cash in his wallet. The exact amount he's got in his accounts. He has a car, that's a used car, so he puts that down. And then he thinks kind of looks around, see what else that might actually add up if he sold it. Things like guitar, clothing, furniture, computers, whatever, all these different things. And when he adds up all the monetary value, the value at that day, he comes to over $7,500. So then the next side is, of course what he owes somebody, his liabilities. And there we see that he's got a little bit in a credit card bill that, that college loan that loan he took out for college. That's really going to be a big chunk for him in over 15,000 and then a few other little things. So his liabilities total 15,000, in almost $15,700 let's say, rounding there. Now remember, to calculate his Net Worth he has to take his assets and subtract his liabilities. And in this situation, he has a negative net worth of over $8,000. That's not unusual for somebody in his position, in his life stage. We really do see often that when people start out as young adults, and they're just starting to work or haven't worked very long in really a full-time job. That they'll have a negative Net Worth, that's not necessarily a problem, but of course we want to see that change over their lifetime and to see that network go to positive and keep going. So let's take a look at how that might be because there's actually kind of a life cycle stage for Net Worth. And when we look at the graph, you'll see that this graph actually shows the median value of assets for households by age. And as you can see, people's Net Worth tends to start out pretty darn low, and then it grows increasingly as their career progresses, as they make more money. Typically, people make more money, have that salary increases as they get more experienced and then it'll grow until probably they retire and then what happens? We start using that money that we've accumulated and that curve will start to go down and that's the typical life-cycle stage that you would see. Now, of course other things can affect Net Worth. Things like medical costs that are large or assisting children with college costs, unemployment. All these things can impact net worth, but this is just sort of the curve that we might anticipate. So remember, calculating your Net Worth annually is a strategic financial tool that you can use to see where you are now and to measure your progress over time. And that can be very helpful as we move forward in financial planning. So what have we talked about today? We said that a balance sheet is really a snapshot of your current financial situation. Then we went on to say that in order to really utilize that balance sheet, you can then calculate your Net Worth. You can subtract the liabilities from your assets and find out your net worth at that time. And remember, it might be negative the first time you do it and worry about that too much, because you're just starting out in your financial life. But remembering to do once a year, I tend to like to do kind of when all my tax documents come in because I've all that financial paper work out can really be a positive. It's very fun to watch it grow over time and to measure your progress. So, take a look at what you want to do in the future, but think about using a balance sheet to help you with your finances. [MUSIC] [SOUND]
