My accountant would not approve

Keeping a form of personal net worth balance sheet is a useful financial planning tool. I've been doing it in one form or another for many years. Keeping a balance sheet requires some decisions as to what is included and what is excluded.

A true statement of (financial) net worth would include every asset ranging from our home to my oldest pair of socks. Each asset would be listed and valued at current realisable value. Every obligation including accruals for future expenses would be set out on the other side of the balance sheet. The difference between the two numbers would be my net worth at a given point in time.

While that approach may meet the approval of purists and accountants, it suffers from three flaws:

1. it is hopelessly impractical. I have better things to do with my time than to count the sets of underwear in the laundry hamper;

2. placing a value on many of the non-financial assets is nothing more than a guessing game;

3. many of the non-financial assets have no relevance to the purpose for which the balance sheet is drawn up. Knowing how many t-shirts I have will not affect my retirement planning.

Accordingly, it is sensible to confine the balance sheet to those items which are relevant to the purpose of financial planning. This is actually quite easy. There are no items (included or excluded) which I have any ambivalent thoughts about.

In the asset side of the balance sheet I include all our investments: shares, properties (including our home), managed funds, bullion, cash and foreign exchange. On the liabilities side I include all our borrowings and accruals for tax (there is no PAYE in Hong Kong), and an estimate of expenses incurred but not paid (e.g. credit card and utility bills). Everything else is ignored.

The items that are not included are items intended to be consumed (e.g. furniture, clothes), paintings (probably worth something but not much), my wife's jewellery (ditto) and my modest collection of claret (at least some of which will be drunk). If we had a car (completely unnecessary in Hong Kong), it would be treated as an item to be consumed and excluded.

Every item in the balance sheet needs to have a number assigned to it. Liabilities are all hard numbers (even the accruals are fairly accurate). Assets such as shares, managed funds, bank deposits and foreign exchange can be valued simply by checking the latest prices on line. The only asset which has any uncertainty attached to it is real estate. Assessment of current market prices is something of a guess. (A real estate agent looking to win a listing will give you a very different number from a bank officer looking for a worst case forced sale valuation.) I take an approach which makes life simple and errs on the side of under valuing the assets. All real estate is included at cost. Cost means the purchase price + stamp duty + agency + initial fit out + other transaction costs. I make no attempt to reflect current values in the balance sheet (although current values of the portfolio are well above cost.

My accountant would not approve but it makes my life easier and ensures that I do not fall into the trap of thinking that I am better off than I actually am.