In order to get the most from this article, also read the following by Personal Finance Editor Kabous le Roux:
Most of us have money goals. I, for example, want to be financially independent and comfortable when I retire. I would also like to go on an overseas trip in the next two years. But, how will I measure my progress towards attaining these objectives?
In order to get where you want to be you have to know where you are.
But, how do you know where you are? Enter The Personal Balance Sheet...
In its simplest form a personal balance sheet is a rundown of everything you own (your assets) less everything you owe (your liabilities), which gives you your net worth.
A snapshot of your financial health
Money constantly comes in and goes out, so your net worth will change from month to month and year to year. Your net worth is, therefore, a snapshot of your financial health at a certain point in time. It's where you are along your journey towards where you want to be.
You can also view drawing up a personal balance sheet as a financial health checkup. Every year (I do one annually, but it can be more frequent if you feel the need) I get an accurate picture of whether my 'health' has improved or not.
Income does not determine wealth
Determining your net worth by means of a personal balance sheet is important, because it's the only way of knowing how rich you are. Remember, your income does not determine your wealth. Earning a massive salary may lead you to attain wealth, but a golden paycheque does not automatically amount to an increase in your net worth.
If you earn R100 000 a month, but spend it all you're left with nothing. You may seem rich, but you're not. Conversely, if you earn R10 000, but manage to save and invest some of it, you're a wealthier person than the aforementioned guy who earns ten times more than you.
Drawing up a personal balance sheet is the first step towards attaining your goals.
How to draw up a personal balance sheet Don't stress yourself out by trying to get all your figures perfectly right. If you don't have all the numbers, just make as good a guesstimate as you can. Even if the numbers aren't 100 percent it'll give you a baseline against which to compare your next evaluation. Assets include things such as your home, car, pension fund, shares, bank deposits, money owed to you, jewelry, etc. Don't cheat yourself. Remember, some assets (especially cars; read 'Smart money buys used') depreciate over time and you have to take this into account. Use a tool such as iafrica.com's Property Price Index to determine the value of your home or other property investments. Liabilities (or your outstanding debt) include the bond on your house, car finance, credit card debt, overdrafts, store cards, outstanding bills, taxes that are outstanding, etc. Assets - liabilities = net worth. As simple as that! To ensure that every year you're richer than before (click here and here for two articles on how to get rich) you need to focus on shrinking your liabilities while increasing your assets and the only way to do that is to pay off your debt (read 'Free yourself from debt') as well as increase your savings. Sounds easy, but how do you do it? Firstly, draw up a budget (click here to learn how) and stick to it. In the budget you should allocate as much of your disposable income as possible towards your debts. If you're debt free, whatever you can afford to should go towards acquiring assets that increase in value (e.g. shares and property). Pay yourself first! I suggest you treat your savings as a monthly account you must pay. Read 'Pay yourself first' to see what I mean. Determining where you are financially is an easy, yet vital step towards attaining real and lasting wealth. Don't wait to take it!
Most waste a fifth of their income without realising it. Plug the hole; give yourself a raise.
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House prices will keep declining for many years to come, according to Rode & Associates...
