There are certain things that companies do automatically that we individuals could also do to achieve better results. I have talked about kick-off in the past, but was thinking of talking about balance sheet today.
Companies are run to make a profit (in most cases) and to be able to do so, certain structures and procedures are required. Keeping track of their finances is of the utmost importance for being able to make decisions within the business.
To use business thinking
Good Finance is a clear example of how we as individuals can do a little more as a company. Companies keep a close eye on income and expenses, which helps them to manage the business.
Dare to take the step of becoming CEO of your own finances and keeping track of income, expenses, assets and liabilities is essential. Not just to see what the situation looks like, but also to be able to make good plans for the future. A balance sheet gives an interesting picture of how your assets and liabilities (including equity) are allocated to different items.
A balance sheet is a snapshot of your assets and liabilities. Just to understand how you can use your balance sheet, I thought to show what our situation looks like.
From our balance sheet above, for example, we can see that we have two dominant items on the asset side. It is our home and our shareholding. In addition, we have two smaller items: our real estate investment (which is at G) and our “alternative investments” which include Better Globe, Good Finance, Goodbank and E-Money. Based on this picture, I think we are quite heavily weighted in both our home and shareholding. If large movements occur in either the stock exchange or the housing market, our assets will also be affected quite a bit, which I see as negative. However, I guess that quite a few have the home that covers maybe 80% or more. In this way, it feels good that we have succeeded in balancing our assets with equities, mutual funds and other investments.
We could still try to reduce the share of housing and shares in favor of other asset classes, in order to reduce the risk among our assets. It could be more alternative investments, real estate, forest, gold etc.
A small side note: even though the property is an asset, it does not really behave like an investment like equities and funds eg. The property behaves more like a debt because it usually costs you money each month for you to be able to live there, it gives you no ongoing return. I will write more about that in an upcoming post.
Equity and liabilities
Equity and debt may not be as fun to look at, but still interesting. Obviously, having a healthy “loan-to-value” ratio is important. If interest rates go up sharply and you have a large proportion of loans, it can have a significant impact on your overall finances. Many people talk about it is dangerous to mortgage the house etc. to make other investments, but if you look at your total “equity and liabilities” you get a different loan ratio compared to just looking at how mortgaged your house is. I have discussed that issue in another post.
Many companies leverage their assets to leverage their investments and revenues. They can get better returns with the help of loans. We can do that with our personal finances too! Now we have a loan-to-value ratio of 22%, which I think is very healthy.