How to Predict Your Financial Future

Imagine an angel showed up at your house and offered to pay off all your debts. But, there’s a catch: You must be able to tell how much money you owe within 5% accuracy and explain it all in 5 minutes or less. Could you pass the test and receive this good fortune?

Sadly, too many adults have no idea where they stand financially. They are unaware of their present financial condition, and even less aware of their financial future. This lack of understanding is what leads to hard road ahead. In contrast, people who know the actual condition of their finances are better prepared to make wise decisions that lead to prosperity. How do you use this knowledge to your advantage?

Start by creating an annual personal balance sheet. (See the sample chart below I’ve provided) This helps you organize and analyze your financial future. You must know where you are in order to create a plan to get to where you want to be in 5 years, 10 years, and 20 years. A “balance sheet” is a list of everything you own and everything you owe, with totals from each category. And, you want what you own to outweigh what you owe. That’s what people mean when they say you to be in the “black” not the “red.” Red signifies a negative balance, which means you have less value on the asset (own) side, than the liability (owe) side.

Use my sample chart to list everything you own on the asset side of the page, such as cash, stocks, real estate, jewelry, cars, etc. List each item for what it’s currently valued at now. Don’t cheat, check the internet for used cars, jewelry, and furniture prices to be sure you’re on track. This is called “fair market value.” List your assets from the most liquid type (i.e. – cash, stocks, bonds, or other stuff you can sell quickly) to the least liquid, (i.e. – houses take a while to sell, cars, etc).

In the liability column, list every credit card, gas card, department store card, car note, second mortgage, mortgage, car loans, and family loans that you owe. List everything, no matter how small the amount might be.

Finally, take these steps to identify your net worth. Add up all of your assets(A), and then add up all your liabilities(L). Then, subtract A from L. The resulting monetary amount will be your “net worth.” Ideally, this number should go up each year, as you save money and pay off debt.

Identifying your net worth is a great way to predict your financial future by taking the pulse of your current finances. People often wait too late to assess their situation. By then, the information can be so dire that it’s hard to make a successful plan. Storm-proof your financial future by taking time today to create a balance sheet and get a picture of where you’re headed.

Download a Personal Balance Sheet (PDF)

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