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A Budget With A Personal Balance Sheet

Creating a budget is a seemingly dreadful chore that most of us, at least, want to avoid at all costs! Formulating a personal budget can be overwhelming, even more so for individuals who are new to the process. Often, we make more work for ourselves than necessary and lose track of our original purpose. However, at some point in time, it may be necessary to create a personal budget for a variety reasons. By combining a budget with a personal balance sheet, one can create powerful tools for personal financial planning.

A budget can be simple or highly complex depending on your personal situation and goals. The form of a budget is not nearly as important as its purpose. One can presumably create numerous budgets to reflect a variety of personal financial planning objectives and scenarios. Do you need a budget to track personal expenses or to formulate a savings strategy?

A personal balance sheet is merely a snapshot of your financial situation at a given time. At its most basic, a balance sheet takes financial inventory of your assets and liabilities. The balance sheet is a gauge of your net worth at a particular time in your life. It can be utilized to ascertain your progress in terms of wealth-building.

The balance sheet: Total Assets – Total Liabilities = Net Worth.

Assets can be financial and non-financial. Broadly speaking, your assets can be derived from earnings such as salary and/or investments as well as non-earning sources such as a classic car collection. Financial and non-financial categories can be broken down into smaller classifications or groupings. For example, financial assets can be classified as cash or cash equivalent, investment and personal property. Cash and cash equivalent assets are those that are either in the form of cash or can be converted into cash such as money market accounts, savings and checking accounts as well as the cash surrender value of a life insurance policy. Personal assets can include antique furniture, automobiles, boats, collectibles, heirloom jewelry, and motorcycles.

Liabilities or debt can also be divided into categories such as fixed or recurring and “incidental”, short-term (i.e., credit card debt), medium-term debt (i.e., a loan to finance a vacation or purchase furniture) and long-term debt such as a home mortgage. Unforeseen expenses such as emergency medical care should also be included in your budget.

How can a budget and a personal balance sheet help?

1. A budget in combination with a personal balance sheet can be inordinately beneficial in personal financial planning. It can help you analyze your financial assets, debt load and net worth in conjunction with achieving specific objectives such as retirement, buying vacation property or a motor home.

2. A budget is often utilized to track personal expenses. Some people may have difficulty remembering how they spent their money. A budget can help you stay on track in terms of both spending and saving. It is prudent to save receipts even from “insignificant” transactions for candy or snacks. Keeping track of your spending habits is the first step to formulating a savings plan.

Popular Misperceptions About Budgets

1. Is a budget permanent?

Absolutely not! We are never stuck with any budget that we create. In fact, a budget can be created to accommodate virtually any time horizon. Any budget that we formulate is designed to help us achieve a specific objective. Every budget is subject to revision. Budgets evolve with our personal situation, needs and priorities over time.

2. How often should I make a budget?

How often you create a budget is entirely dependent on your interests and personal situation. It may well be that you do not need a budget for every week, month and year of your life. A budget is extremely useful for planning intermediate or long-term expenditures and in personal financial analysis. A budget along with a personal balance sheet can depict your financial progress far more accurately than almost anything else. However, for those individuals who have limited expenses and can extrapolate their financial situation by analyzing their checkbook (which is, hopefully, always balanced!), reviewing their household bills and investment statements, a budget and/or personal balance sheet may be utilized for charting specific personal financial plans.

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