The Balance Sheet

How are your family's finances?  If you are like me you will say either "How would I know?"  or "Why would I care?"  The Balance Sheet is an idea that will answer the question of how your family's finances are.  What is a balance sheet?  I am no accountant, so this is the super simplistic possibly wrong explanation.  But here it is.  A balance sheet is like a teeter-totter.  On one side of the teeter-totter you put your assets, and on the other side of the teeter-totter you put your liabilities.  Where does the teeter-totter lean?  If it leans to the assets, you are in the black (good).  If it leans to the liabilities, you are in the red (bad).  What is an asset?  What is a liability.  Rich dad, Poor dad is a book that teaches that concept well, although other concepts not as well.  An asset puts money in your pocket.  A liability takes money out of your pocket.  So your car turns out to not be much of an asset if it is like my car.   But your 401(k) is an asset.  Your credit card debt is a liability, as are your student loans and your mortgage.  Your stocks and bonds are assets, as is money in a CD.  So open up an excel document, put assets on one column, and add them all together.  Put liabilities in another column, and add those all together.  Subtract your liabilities from your assets, and that is your equity.  Work at getting a positive equity, instead of a negative equity.  If you have a negative equity, don't freak out, a lot of people do.  Work at making it move toward a positive equity.

Assets                             Liabilities
401(k)   $4000                Credit card      -$2000
CD        $1200                Student Loans  -$12,000
Checking  $600               Mortgage         -$56,000
Cash        $200                Hospital bills    -$750

Total Assets  $6000         Total Liabilities  -$70,750

                                        Equity            -$64,750

The above is an example of a Balance Sheet.  Maybe it is similar to what yours would be, maybe not.  Some would say "Pay off the smallest bill first."  That is not a bad idea, but here is a better idea.  "Pay off the liability that carries the highest interest rate.  That will probably be the credit card, since their interest rates are meant to take money from you for the rest of your life.  If one liability carries a 5.0% interest rate, and another carries a 8.95% interest rate, pay off the 8.95% rate first, even if the 5.0% is smaller.
So go make your balance sheet so that you can know how your family's finances are.  You may be surprised.