To pay for some of these assets (such as a home or car), we usually take on personal liabilities. Your liabilities include mortgage and other debt. Credit card debt is a major personal liability for some of us.

Your personal net worth is the mathematical difference between your personal assets and personal liabilities. A personal balance sheet is a way of viewing your assets and liabilities.

This personal balance sheet lists personal assets on the left side, and personal liabilities, and net worth, on the right side. The two sides’ totals must equal. This is a basic equation of accounting. The following example shows a personal balance sheet for a fictitious person who has a personal net worth of $32,000.

Personal Assets Value Personal Liabilities Value Cash & savings accounts $10,000 Credit card balances $8,000 Retirement plan $30,000 Auto loan $15,000 Home $100,000 Student loans $20,000 Auto & personal property $15,000 Mortgage debt $80,000 Total personal assets $155,000 Total personal liabilities $123,000 Personal net worth $32,000 Liabilities and net worth $155,000

An important assumption concerns the value of your assets. While the market value of most stocks and bonds can be easily determined, an appraisal may be needed to determine the market value of your home or other assets. Unless you have an appraisal, be conservative in estimating the value of your assets. Most lenders will discount your stated net worth on an application if the assets don’t have a current appraisal value.

Your personal net worth is a moving target. If appraisal or market values change, your personal net worth does too (by an equal amount and in the same direction). This is why your personal net worth is “as of” a specific date. A year, a month, even a day later, your net worth may change, depending on the composition of your assets and liabilities.

Knowing your personal net worth will also be helpful if you apply for credit. One of the very first things you do when you apply for a loan is complete a credit application. On this application, the lender asks for your personal balance sheet. You show your personal balance sheet so that the lender can make a more informed credit decision. (You should count on the lender to verify your figures before making a credit decision.) Lenders know that the greater a person’s net worth, the greater the resources to pay off a loan, and the less likely a person is to default on a loan.