When developing a plan for your finances, toughest question often is: “Where do I begin?” Before investing in stocks and bonds or buying life insurance, before implementing any change or making any decisions, you first need to analyze and understand your entire financial picture. Two documents allow you to do just that. A Balance Sheet and a Cash Flow Statement enable you to take an in-depth look at your current financial situation and make better decisions about future. With a little work, you can develop these two tools and be on your way to a solid plan for your finances.

Balance Sheet A balance sheet is a snapshot of your personal finances at one point in time. It contains two main elements: what you own (assets), and what you owe (liabilities). Your net worth is expressed as: Net Worth = Assets – Liabilities. That is, what you own minus what you owe.

A balance sheet clearly lists all assets and liabilities. Examples of assets include: house, investments such as stocks and bonds, savings and checking accounts, 401(k), IRAs, business interests, artwork, and jewelry, among others. Liabilities include mortgage balances, credit cards, education loans, and any other debt. Once you have created a list of everything you own and everything you owe, simply subtract sum of assets from sum of liabilities- this is your net worth.

The ultimate goal of most investors is to increase their net worth. The balance sheet is a very useful tool to identify strengths and weaknesses in your current finances, as well as to determine your goals for future. Someone with a disproportionate amount of liabilities might set a goal to eliminate this debt. On other hand, someone with a positive net worth (more assets than liabilities) might plan to save and invest towards retirement, college, or another goal.