Ode to Balance Sheets

Why all the recent fuss about balance sheets during our client meetings? As advisors, when we look at a well crafted balance sheet, we can often get a good reading on where your financial life is and where it might go. It’s a simple tool, a snapshot, a starting point.

Most people understand what a balance sheet is. In its basic form, it is two lists: assets (what you have) and liabilities (what you owe). The difference between these two figures is described as your net worth. Having many assets is good. But if you have an equal number of liabilities, you aren’t very wealthy. At the same time, you can feel wealthy if your assets aren’t plentiful, but your liabilities are few.

A balance sheet is visual. When we talk to you, we find it helpful to complement our words with pictures – the more personal the better. A balance sheet fulfills that role. When we review a balance sheet together, we are all on the same page. We look at the balance sheet. We talk. Then we look at the balance sheet again. Then we talk some more. Almost every point we raise can be transferred onto that one page visualization of your financial life.

Here is a simplified look at a personal balance sheet. (Assets are listed with reference to ownership, title, custodian and current value. Liabilities include interest rates and terms of the debt.)

Assets
Cash and Cash Equivalents (Savings, Money Markets and CDs)
Retirement Accounts (Retirement Plans, Traditional and Roth IRAs)
Non-qualified Assets (Trusts, Brokerage Accounts, NQ annuities)
Education Assets (529 plans, UTMAs, Other Education Savings)
Real Estate (Primary Residence, Second Homes, Investment Property)
Other Assets (Business Ownership, Private Mortgages Held, etc)

Liabilities
Real Estate (Mortgages, Home Equity Loans, Lines of Credit)
Installment and Revolving (Credit Cards, Car Loans, etc)
Education (Student loans)
Other (Private Loans)

Net Worth (Assets Minus Liabilities)

Notes: wages, future pensions, social security, potential inheritances/gifts, and planned expenses

Let’s start with the upper left hand corner of the balance sheet. Cash. Some of the questions often raised in our meetings revolve around your view of your most liquid assets. Have you accumulated more than enough cash and are wondering what to do with the excess, now that interest rates are so low? Do you use excess cash as a counterbalance to your investments, providing you with a sense of security even as the markets swing wildly? Or do you not have enough cash, living too close to edge of your paycheck and not enough in reserves?

The debt side of the balance sheets also offers an opportunity for dialogue. Many of you have already refinanced, so you might ask, is it time to pay down that mortgage? The answer for any mortgage question depends on the balance, the interest rate, the term of the mortgage, your age and your attitudes towards debt. Mortgage questions, as all questions, deserve very personalized answers.

Paying off credit cards is an obvious opportunity to getting a guaranteed return with no risk. What becomes more interesting, (after we cross off the credit card on the balance sheet) is where to redirect the month payments. Retirement accounts? Other debt balances? College funding? House fund?

There are many more discussions that can be derived from the balance sheet.
•   Are accounts titled in line with estate planning goals?
•   How to treat investment property in retirement planning?
•   Is there room for a second home under Real Estate Assets?
•   Should we consider a Roth conversion?
•   How do we pay for college?
•   Have we saved enough? Etc.

When most people think about balance sheets, they assume the primary purpose is to determine net worth. But by now it should be clear that balance sheets can be a wonderful planning tool, as well. Pair it with a comprehensive discussion of your financial life, and you can get the answers to a lot of your most pressing financial questions.

StrategicPoint Working with You
If you have any questions about your assets and liabilities, please give us a call so we can have a discussion with you about your financial future.

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