Building a Strong Financial Foundation
To build a strong financial foundation you need to be clear on several elements in knowing your personal financial situation. We have talked about your personal income statement and your personal net worth statement, and last but not least is your personal balance sheet.
Personal Balance Sheet Definition:
These three balance sheet segments, assets, liabilities, and net worth give lenders an idea as to what the person owns and owes, as well as the amount invested by the person; according to yourdictionary.com.
Personal Assets Definition:
Personal assets might be tangible or intangible. They can be assets owned by the person or assets related to the person’s personal characteristics.
Examples of owned personal assets include:
- Checking account
- Collectibles Electronics Insurance
- Investment accounts
- Retirement account
- Savings account
- Investment Real Estate (added by Rick Harris)
Part of examples provided by yourdictionary.com
Personal Liabilities Definition:
A financial obligation for which an individual is responsible and which may be satisfied out of her or his assets. (according to Business Dictionary)
Net Worth Definition:
Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities.
Read more: Net Worth | Investopedia https://www.investopedia.com/terms/n/networth.asp#ixzz57W58RHAE
The part many people overlook in the definition of a personal balance sheet is the term “a specific period of time”. Your personal balance sheet is fluid and if you have investment real estate as part of your personal balance sheet; your net worth could changes frequently.
If you own 4 investment properties and your mortgage payments on these properties are scheduled every 15 days; the amount owing to the lender would be diminishing and your equity in each property would rise. Think about the positive impact to your personal balance sheet if you took on no new debt and just chipped away at paying down your mortgage amounts every 15 days.
Having revenue property and your rent cheques cover all costs of operation meaning your rental revenue is neutral on your investment properties. Your tenants are paying down your mortgages as your personal balance sheet changes with positive momentum to your net worth.
Knowing every 15 days your personal balance sheet changes; would this not be a great incentive to set up a systematic way to review your personal balance sheet?
Being able to demonstrate to a lender how investment real estate is a method building your financial foundation twice a month; don’t you think they would continue to support you in your financial endeavors?