Formulate a Financial Plan

Know Your Net Worth

Manage & Minimize Debt

Accumulate Assets

Budget to Live Within Your Means

Understand Investing Basics

Plan for Retirement

Insure People & Property

Deal with Financial Advisors

Review Your Employment Contract

Make Plans for Your Estate

Make Good Decisions


Since a balance sheet provides a snapshot of your net worth at a particular time, you can track changes in your assets, liabilities, and net worth by comparing balance sheets entries at different time points. For ease of demonstration, I convert the two-column balance sheet into a single-column format in Figure 3, below.


Figure 3: Multi-Year Personal Balance Sheet for:

Dr. John Q. Public (in thousands of dollars, at year-ends)

























In this example, net worth steadily increases as assets increase and liabilities decrease. This reflects a healthy progression. When households fail to live within their means their assets decline and/or their debts increase. The result is a decrease in net worth, which is a financial planning setback.

Note that some of the entries in the balance sheet are not legitimate pillars because they are not reliable stores of value over the long term. This includes car(s), furniture, electronic equipment and any other property that can be expected to lose value over time rather than increase in value. We refer to these as depreciating assets. In contrast, legitimate pillars are appreciating assets—those whose value is expected to increase.

This observation helps us refine our earlier financial planning objective from “accumulate diverse assets” to “accumulate diverse appreciating assets.”

When you borrow additional money, your balance sheet expands. The amount of the borrowing appears on the right side as more debt, increasing total liabilities. That same amount also appears on the left side, either as cash, or as some new asset, if that’s what the borrowing was for (for example, another real estate property). This increases your total assets. As long as it’s financially affordable and emotionally comfortable for you, borrowing to gain more appreciating assets can be a good move—you’re collecting more pillars! But if you take the borrowed cash and spend it (an economist would say you “consume” the cash), you end up wasting it, and simply going more deeply into debt. Your total liabilities will go up while total assets remain the same, and your net worth will decrease. Examples of wasting borrowed money include throwing unnecessarily lavish parties, overspending on travel, and gambling.

Balance sheets (and all other financial statements for that matter) can be used for forecasting. If your forecasted net worth steadily increases—congratulations, you’re heading in the right direction! If the forecasts show declines—you’ve got a serious problem. In such cases you need to reconsider your debt balances and your asset choices. You should also take a closer look at your budget (discussed later) and ensure you are living within your means.

Figure 4 shows the evolution of total assets, total liabilities, and net worth for a doctor in her last year of residency. The numbers are represented graphically in Figure 5.


Figure 4: Hypothetical Assets, Liabilities, and Net Worth

(in thousands of dollars)









The young physician initially has $45,000 in assets, primarily in a university hospital retirement plan, and $200,000 in student debt. Her net worth is negative—a common state for medical trainees. The next year she begins her first real job and her salary increases from $60,000 annually to over $200,000 (income is not shown on this figure). Assets during this second year are assumed to increase by a healthy $41,000 due to retirement plan contributions and an employer match. Debt grows by a further $240,000 due to a home purchase and associated mortgage. The upward spike in debt drives net worth deeper into negative territory. Thereafter, assets grow and debts are steadily paid down. The steady increase in assets arises from new retirement plan contributions combined with gains on existing investment assets. In this example debt is forecasted to decrease steadily. A household may, of course, exhibit occasional increases in total debt. As long as those increases are used to fund appreciating assets, for example, purchase of a rental property, the additional debt may be reasonable. If the additional debt is not used to increase assets, it may be inadvisable and should be avoided.











In this chapter we engaged in a high-level view of debts and assets. The next two chapters provide, respectively, deeper examinations of the debts we are likely to accumulate and the different assets (pillars) we should strive to build over time.

Related Links:

Medscape Physician Debt and Net Worth Report 2016 (

Medscape has more recent reports, by year, gender, location, and specialty. The 2016 version is provided because it is publicly available and does not require registration on the site. You should be able to create login credentials to access more recent materials.