As an investor, I look at the statements of many companies before I make a decision to invest. This week, we will look at our own personal financial statements. This may involve some leg work for each of us, but I think the project will be worthwhile in retrospect. Today, we are going to start at the core of our financial health, the balance sheet.
For those of us who have not taken accounting, here is a quick rundown. Assets on the left, liabilities on the right, shareholder’s equity below liabilities. Assets + Liabilities = Shareholders Equity. For us, equity is synonymous with net worth.
To build my balance sheet, I used my most recent Net Worth IQ entry and made a few adjustments using Excel. For more about NetWorthIQ, see the net worth link on the personal finance arsenal or click here.
After some manipulation, I came up with this Personal Balance Sheet:
Remember that the balance sheet is a snapshot in time. Every time you buy something, cash (asset) goes down or credit (liabilities) goes up. If you buy an asset, such as a car, home, or valuable personal property, your property asset goes up.
Assets as a positive number plus liabilities as a negative number give you your personal equity. If the number is positive, you are in fair financial shape. If you are in the negative, you are in bad shape. Here is a condensed version of my balance sheet that is more comparable to a corporate statement:
Looking at the balance sheet on a short term-long term basis, we can see our immediate liquidity. A common measure of immediate liquidity is the quick ratio, or current assets over current liabilities. My quick ratio (12,768/227) is 56.25. That means I can cover my current assets 56 times with my current liabilities. A quick ratio of 1.0 means you are living literally paycheck to paycheck. A quick ratio below 1.0 means you are dealing with immediate liquidity issues (can’t make payments).
Most companies use within one year as current. I am using within one month as current, as that is more appropriate for a person making regular bill payments. I just made a tuition payment, so my ratio is actually quite a bit lower if I used today’s data. In one month you can undergo a big change.
Working on saving, investing, and cutting credit card debt will dramatically increase your quick ratio. If any of you do this, please post your quick ratio in the comments if you feel comfortable doing so. Keep on the lookout for the Income Statement and Statement of Cash Flows later this week.
