Taken a cursory glance at a company balance sheet lately? It details the shape of the company's finances, and tells you whether anything is going out of whack. You may be surprised to hear this, but you could do something similar for your own finances too-to keep yourself in fine financial balance. The basic principle: your expenses and liabilities must stay within control range of your earnings and assets.

Your Financial State

Just as you assess where you are currently and set a goal for where you want to go in some years, you should have an idea of your financial position now and what you want it to be.

Keeping monthly expenses within a budget, and eking out extra cash, is what everybody does. The actual balance sheet, however, is a figure-ridden document that puts down your assets and liabilities, and thus helps you figure out your net worth. This, very few bother to do.

It's fairly simple, actually. First, the good part. Sum up all your assets-things you own of tradeable value. These would typically include cupboard cash, bank account balances, bonds, stocks, mutual fund investments and retirement funds, in addition to the current value of insurance plans, vehicles, art objects, jewellery and immoveable property (a house, even on a loan, is an asset). Add it all up, and you get a figure for 'total assets'.

Next, add up all your liabilities, everything you owe. These include long-term debt such as home loans, as well as short-term debt like car loans, consumer loans, credit card debt, education loans and personal loans (on a holiday, for example). Add up all your EMIs. You get 'total liabilities'. Now, broadly, the difference between total assets and total liabilities is your net worth.

Net Worth Management

Has your net worth grown? Or are you living heavily on debt? Have you invested enough? To answer all this, you need financial planning. "Financial planning is not only restricted to parking funds in a range of investment avenues available, but is an itemised evaluation of a person's current and future financial needs," says Ranjeet S. Mudholkar, CEO, Association of financial planners, "it is need based."

Typically, people in the early phase of their careers, from 25 to 35, are heavily indebted, since an individual or family life has to be put together through big-ticket purchases. From 35 to 55 comes the net worth maximising phase, as investments are made and assets built. After 55, people live off what they've got and prepare to bequeath some.

The key indicator remains your net worth. Once you have your current figure worked out, you must also put together a regular income-expenditure chart. If you have a monthly surplus, you could use the money to enhance your net worth. Anyhow, if your savings are stable month after month, or preferably rising at a predictable rate, you can assess how much money you can gather over the years. Now put this figure aside, and set yourself some financial goals (short-term and long-term). Don't be afraid to be ambitious here, by the way. The task now is to figure out how these goals are to be met, working backwards.

Income is just that, income. Unless you get a major break, it will follow a steady incline over the years, and you will get to save some of it. But the big difference to your net worth will be made by your investments. Over a couple of decades, judicious planning on this count can probably make you wealthy even on a moderate income. The word to note here is 'probably'. It's not certain, mind you, since investments always involve some degree of risk. The question is how much risk you're wiling to bear on your way to meeting your goals.

Once you're clear about that, you can go about putting your surplus cash to use in the manner most likely to succeed. There are specialists called Financial Planners who can help on these decisions, though you are welcome to work it out for yourself. "Financial planning is all about design," says Devang Shah, Director, Right Rreturns Financial Planners, a fee-based financial planning outfit, "Once the planning is done well, more than half your job is done."

Balanced Planning

The choices are never easy. A 32-year-old executive with surplus cash of, say, Rs 3.5 lakh could be caught between prepaying the outstanding amount on his home loan or using the money to shift from an old Palio to a new Honda City, for example. Meanwhile, there might also be a smart new computer he's been aspiring to get.

Considering the effective interest rate one pays on a home loan taken in recent times (especially as applicable to someone in the highest tax bracket), it makes sense to continue with the loan. So, does he get to cruise around town in the plush comfort of that aerodynamic new car? Perhaps not. Wise counsel, instead, would be to opt for a moderate upgradation-to a Ford Ikon or Opel Corsa, for example, which are also sedans. Or to get that computer (a loan on which is not quite so attractive). And the rest of the money? That would be well deployed in an equity mutual fund.

That's the effect of planning. Instead of meeting just current needs and desires, the discipline requires you to think ahead-and work towards a net worth. Done this way, the 32-year-old could possibly get himself his fancy set of wheels some years later, but end up with a higher net worth only because he also bought a fund.

Sheet Watching

The whole point of all the asset-liability calculations is to track your balance sheet as you go along. Investments, of course, need the closest monitoring. But don't be overzealous. "If your portfolio design is right, a yearly review of portfolio is enough," says Shah. If there is a sudden contingency-such as inflation breaking out, you could do an interim review as well. If you have your numbers neatly on a sheet in front of you, you'll be prepared for quick decisions.