Personal balance sheet
Also written Statement of net worth
A statement of an individual's or household's assets and liabilities at a particular date, whose difference is net worth — the starting point for the personal finance ratios.
In plain language
A budget shows money moving over a month. A personal balance sheet is a photograph: everything the household owns and everything it owes, on one page, at a particular date. Things change after that date and the balance sheet changes with them, but the snapshot is what lets an adviser see how things are stacked up.
Assets include physical assets such as property and a car; financial assets such as equity, debt and mutual fund investments; and cash and bank balances. Liabilities include the various loans outstanding and other payments due, including short-term debt such as credit card dues.
The difference is net worth. The workbook's point is that individuals tend to look at total assets, but it is net worth that is more relevant.
How it works
Lakshmi's balance sheet, from the workbook:
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Net worth | 24,15,000 | House | 18,12,000 |
| Housing loan | 12,02,000 | Car | 3,25,000 |
| Credit card dues | 5,000 | Mutual funds | 8,40,000 |
| PPF | 3,20,000 | ||
| Shares | 2,80,000 | ||
| Cash and bank | 45,000 | ||
| Total | 36,22,000 | Total | 36,22,000 |
Net worth = total assets Rs 36,22,000 − total liabilities Rs 12,07,000 (12,02,000 + 5,000) = Rs 24,15,000. As in a company balance sheet, net worth is shown on the liabilities side so that both sides total the same.
The workbook's reading: there is a house and a car; investments are still a bit low compared with the house and not much in growth assets like equity; the bank balance is not very high; and net worth is relatively low because most assets were bought with loans that are largely outstanding.
Physical versus financial assets. Physical assets are tangible, seen as natural hedges against inflation, but illiquid, lightly regulated and large-ticket. Financial assets are standardised, regulated, easier to compare and available in small units.
Net worth should be calculated periodically and the progress tracked.
The formula
Net worth = Total assets − Total liabilities
A worked example
Run the workbook's other ratios on Lakshmi's own balance sheet. The ratios are computed here; the balance sheet figures are the workbook's.
Leverage ratio = 12,07,000 ÷ 36,22,000 = 33.3%
Solvency ratio = 24,15,000 ÷ 36,22,000 = 66.7%
Financial assets = 8,40,000 + 3,20,000 + 2,80,000 + 45,000 = 14,85,000
Financial assets ratio= 14,85,000 ÷ 36,22,000 = 41.0%
The numbers agree with the workbook's prose. A third of the assets is still owed to lenders. Less than half the assets are financial. And only Rs 45,000 sits in cash and bank — if her monthly expenses including the home loan EMI were, say, Rs 40,000, that is barely one month of cover against the 4 to 6 months the liquidity ratio benchmark asks for.
Now roll the snapshot forward a year, assuming she repays Rs 1,00,000 of the housing loan, clears the card, adds Rs 1,50,000 to mutual funds, and nothing else changes. Assets rise to Rs 37,72,000 and liabilities fall to Rs 11,02,000, so net worth becomes Rs 26,70,000 — up Rs 2,55,000. That rise, not the Rs 36 lakh headline, is what periodic tracking is for.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), section 3.6 on creating a personal balance sheet and net worth, feeding the ratios in 3.9 — total assets (3.9.2), total liabilities (3.9.3), leverage (3.9.4), net worth (3.9.5), solvency (3.9.6) and financial assets ratio (3.9.9). Expect a list of assets and loans from which you compute net worth, and conceptual questions on physical versus financial assets.
Common exam traps
- A balance sheet is at a date; an income and expenditure statement covers a period. Questions mix the two.
- Net worth sits on the liabilities side of the workbook's table so both sides balance. It is not a liability owed to anyone.
- Credit card dues are a liability, however small — Lakshmi's Rs 5,000 is in the total.
- Total assets is not wealth. Net worth is the relevant number.
- For goal planning, a conservative approach excludes personal jewellery, the residential house the family lives in and assets meant for personal use such as a car (3.9.2). Lakshmi's balance sheet includes the house and car because it is a statement of position, not of assets available for goals.
- Loans taken to buy financial assets are leveraging, which the workbook calls risky because of the higher volatility of such assets.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- Financial assets ratioThe share of an investor's total assets held in financial form — shares, deposits, mutual funds — rather than physical form such as gold or real estate, expressed as a percentage.
- Leverage ratioTotal liabilities divided by total assets — the personal finance ratio that measures how much of a household's asset build-up was paid for with debt.
- Liquidity ratioLiquid assets divided by monthly expenses including loan repayments — the number of months a household could keep paying its bills from short-term assets if income stopped.
- Solvency ratioNet worth divided by total assets — the share of a household's assets it truly owns after all liabilities, and the complement of the leverage ratio.
- Total assetsThe current market value of everything an individual owns — physical and financial — and the figure from which total liabilities are subtracted to get net worth.
- Total liabilitiesEvery loan and unpaid bill a household owes — home loans, car loans, personal loans and card dues — added together; assets minus this figure gives net worth.
- Income-expense statementA personal financial statement showing actual income earned and actual expenses incurred over a period, recorded on an accrual basis rather than when cash actually moves, revealing the real surplus or shortfall.
- Zero base budgetingBuilding a budget from a clean slate each period and justifying every expense afresh, instead of adjusting last period's numbers — a corporate technique applied to household budgets.
- LeaseA contract in which the owner of an asset, the lessor, lets another person, the lessee, use it for a period in exchange for lease payments — and keeps ownership throughout.
- Six-step financial planning processThe 6-stage sequence an Investment Adviser follows with a client — define the relationship, gather data, analyse, recommend, implement, monitor — set out in Chapter 1 of the Series X-A workbook.
- Savings to income ratioTotal accumulated savings divided by annual income — a measure of how prepared a household is for long-term goals such as retirement, expected to rise with age.
- Consumption assetSomething bought for use, like a car, that does not generate income or grow the household's wealth, as opposed to an investment asset such as property or a bond.
- Growth-oriented assetAn asset held mainly for capital appreciation rather than regular income — such as equity shares or gold — as against an income-oriented asset, held mainly for the periodic payout it generates.