What is the utility of a balance sheet format for individual?
It helps us to manage keep our personal finance in order.
How it does this job? It simply asks us to maintain a record few things.
What are those things?
- Identifying expense heads.
- Establishing a budget.
- Recording all income and expense.
- Generating a report.
- Studying the report.
This looks like a lot of hassle, right?
But do not worry, a balance sheet format for individual does more good and no harm.
In the beginning it may look cumbersome, but over time its utility will be exceptional.
It has powers to change ones personal finance conditions dramatically.
Just start the process as part of your personal discipline.
Like you take care of your health, use the balance sheet format to take care of your financial health.
#1. Effectiveness of balance sheet format for personal use is proven
How we can vouch for the effectiveness of personal balance sheet usage?
Because we are not the one who are going to use it for the first time.
Companies as a rule manage their finances methodically. They manage it by maintaining financial statements.
The financial statements that companies maintain are:
- Balance sheet.
- Profit & Loss Account.
- Cash flow statement.
You must be already wondering why they do so much effort to prepare all these reports.
There are two reasons:
- It is part of a good business practice (good habit).
- It keeps their finances in order.
Anything which is part of a good habit, and also benefits the user, can be followed almost blindfolded.
Ask a common man who runs a marathon as a hobby, “why he takes so much pain?”.
His will answer, he loves to do it and moreover the benefits of running is phenomenal.
Maintaining a personal balance sheet format for self is just like Marathon Running.
Till you have not started, it will look like “impossible to do”.
But with time, it has powers to change your life.
#2. Have your own personal balance sheet format
I always wanted my personal finance to be more organised.
At least I wanted to start a process, of managing money. Simply earning and then immediately spending was not helping.
There must be a plan which must dictate the following:
- How we earn money.
- How we spend money.
How to build a plan?
Have your own personal balance sheet format in Excel.
Earlier, I never bothered to record my income & expenses. Preparation of personal balance sheet & other financial statements never came to my thought.
But analysis of the following must be done to get ones personal finance in order:
- Assets & Liabilities.
Hence I prepared personal balance sheet & other financial statements for myself.
My personal balance sheet was in a simple MS Excel format.
I have shared the screenshots of what my balance sheet format looks like.
I will suggest you to take a clue from it and prepare one for yourself.
Be assured, you will enjoy the proceedings.
Moreover, always keep this in mind that what you are preparing is going to change your life for good.
#3. Some insight into my personal balance sheet format
The template in excel format has worked very useful in managing my personal finance.
Day to day transactions are updated in excel.
I have been maintaining this excel format for almost a decade now.
In the course of these past years, I have made several changes in the template.
A personal balance sheet has roots in the following:
- Preparation of Cash Flow Statement (I like calling it cash balance).
- Recording of all expense (Cash-out).
- Recording of all income (Cash-in).
- Linking income with asset-base.
- Linking expense with Liability.
Step 1 of my balance sheet starts from the preparation of cash flow statement.
Idea is to visualise, which expense is consuming how must income.
Why it is called cash balance?
Because it satisfies this equation: All Expense = All Income.
In this article we will see a template in excel format of a personal balance sheet, cash flow statement and personal income expense report.
#3.1 Cash Flow (cash balance) in Excel
This cash balance (cash flow) statement helps to balance income and expense.
The concept of cash balance says, we can spend on things only in two conditions:
- If our savingscan fund the purchase.
- If our income streamcan fund the purchase.
What means by income stream?
People earns money. But all money does not come in hand at a time. It comes in phases.
- Annual Salary : $100.
- Monthly Component : $7 (7×12=84).
- Annual Component : $16
- Total : $100
What does it mean?
One must plan the expenses (cash-out) in a way which compliments the “savings and income stream (cash-in)”.
Even if the income is high, but cash flow each month is poor, the person cannot commit to high monthly expenses.
Even if the income is high, but savings is poor, the person think twice before spending.
#4. Cash balance helps to stop overspending.
[P.Read: Article on overspending which also has a personal finance calculator]
It is common, people tend to overspend a lot.
This happens because we do not realise that they are overspending. Why this happens?
Because people are not aware of their “Cash Flow”.
Cash helps people realise what they can afford and what they cannot.
How to know this?
- Step 1 – Check if you have enough savings.
- Step 2 – Check if your income streamscan help you purchase your thing.
Ideally, all purchases must be done from the accumulated savings.
Forget about your next paycheck. Try to purchase everything from your savings.
Use your income stream to build savings, and not to support your expenses.
This way there is a cent per cent chance that, overspending will not be allowed to creep in.
Suppose, you desperately want to buy a Apple MacBook (Rs.75,000).
When you checked your cash balance statement (Miscellaneous Shopping), you found that you only had Rs.50,000 as savings on this head (see the above screenshot).
This is a clear hint that, at present you cannot afford to buy this MacBook.
Either you will have to wait to buy a cheaper Windows laptop.
Suppose you are required to pay school fee of your child semi-annually.
Semi annual fee is Rs 24,000.
When you checked your cash balance statement (School Fees of Child), you found that you had Rs.28,000 as savings on this head (see the above screenshot).
This mean, you have saved well to fund this expense.
#5. Combined view of personal balance sheet & income statement
My cash flow statement helped me to prepare other personal financial statements as well.
This is where the real utility of personal financial statements can be seen.
When we see all three financial statements together, it helps us realise many things.
But before we go into analysing mode, lets see how to prepare our personal balance sheet.
All translations those are recorded in cash-flow statement can be categorised and organised in following heads:
My personal cash-flow statement has been categorised like this. Its template in excel format looks like this:
I have been personally using these sheets since last 6 years.
It gave me great realisation and awareness about my money flows.
Experts may say that the sheets I have shown are not strictly correct representation of financial statements. But it has worked for me.
The logic based on which I have categorised assets and liabilities can be debatable.
But this simple logic has made me see that side of money management that I could not have seen otherwise.
Important is to categorise all expenses as:
- Contributing to build an asset (savings, investments),
- Contributing to support a liability (bills, EMI’s, etc).
The logic that goes behind categorising expenses is like this:
- Assets add money to our pockets.
- Liabilities takes money out of our pockets.
#6. How to read the personal balance sheet format
One glance at your balance sheet and income/expense statement should make the following this clear:
- Which expenses are contributing to “Asset” building.
- Which expenses are contributing to support “Liability”.
- Which are the sources of income – Cash-ins (salary, others etc)
- On which head, the spending is most.
- How much is being saved and invested.
- What is ones Net Worth (Asset – Liability) as on date.
#6.1 How to treat your home in which you live?
Suppose you bought a home for rental income. You took home loan.
The monthly EMI payments will be one sure expense.
But does the market value of property will go in “Asset” column? Yes and no.
- Yes – when Rental income minus EMI is positive.
- No – when Rental income minus EMI is negative.
In majority cases, our rental income minus EMI will be negative.
Hence, the property shall not be listed in Asset Column.
Remember: An asset must add money to your pocket. It it is not doing this, it is a liability.
Though it is atypical case where one day this liability will become an asset.
#6.2 How to treat your vehicle?
You may have multiple vehicles, but do not added them in you asset column.
Vehicle only add to expenses. Hence it is a big liability.
#6.2 How to treat furnitures and gadgets?
Do not add furniture’s, Television, Kitchen Set, Dining Set, Fridge, Gadgets etc in asset column.
None of these items creates income.
These items are all like sitting ducks doing nothing for my personal income generation.
Traditional accounting rules tells us that these (house, vehicle, furnitures etc) are our assets.
But Robert Kiyosaki suggests to define assets as one which generates regular income.
Though it is a very stringent way to define assets, but for ones personal finance this theory works like a magic.
It is very important to have a balance sheet format for individual in excel.
It allows people to organise their money-flow.
It also let people visualise their Net Worth (Asset – Liability).
You might be surprised to note this fact that, majority of us have a net worth in negative.
Apply the below theory to your life and see if your net worth in positive or not:
- Identify assets.
- Identify Liabilities.
- Calculate Net Worth (Asset – Liability).
If your current Net worth is negative, it is high time to create one personal balance sheet format for yourself.