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Friday, 02 March 2018 11:33

Why You Need a Personal Balance Sheet

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How do you know if you’re on track to meet your financial goals if you do not know your present situation? I’m sure you’re familiar with the phrase “going from point A to point B”, but most of us will need to pack our bags before we map our course so that we are prepared for the trip and are ready when we arrive.

At WealthPoint Advisors, we always begin by advising our clients to start with this important first step – building a personal balance sheet. This is a simple one-page document that lists what you own (assets) and what you owe (liabilities). Then subtract your liabilities from your assets to arrive at your net worth. For your sake, I hope this number is positive. Every year, business owners record their assets and liabilities on a business balance sheet to track the health of the business and see how it has grown over the years. Individuals and families should do the exact same thing.

My goal today is to explain why you should track your net worth annually and provide an example of how to track a family’s net worth.

Net Worth = Assets – Liabilities

Why should I track it?

There are many reasons to track your net worth, including:

1. Having a quick summary available to see your current financial status

2. Knowing where you’ve been and if you’re trending in the right direction to accomplish your goals (hopefully in an upward direction)

3. Provide an accounting of all assets/liabilities in case this needs to be shared with a family member or other professional advisor (e.g. CPA or attorney)

The best way for me to track if I’m moving the ball forward in improving a family’s finances is to track net worth on an annual basis.

How do I create it? (Pack Your Bags)

Gather all financial statements that you and your spouse have for each 401(k), IRA, mortgage, loan, credit card, 529, Roth IRA, brokerage, checking, savings, or other financial accounts. Once gathered, start filling out the buckets below with who owns what in what area.

Assets:

• Cash Equivalents: Checking, savings, money market

• Taxable Assets: Brokerage account, vested employer stock

• Tax Qualified Assets: 401(k), Roth IRA, 403(b), Traditional IRA, Health Savings Account

• Business Assets: Current company market value, partnership interests

• Personal Property Assets: Autos, jewelry, home furnishings, etc.

• Real Property Assets: Primary residence, secondary residence, summer home, farm

Liabilities:

• Short-term: credit card, auto, student loans

• Long-term: mortgage, home equity line of credit

Net Worth = Assets Liabilities

See below for an example balance sheet of Fred & Wilma Flintstone:

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At the bottom of the balance sheet, I encourage you to include a section for things you want to track but don’t necessarily want to include in your personal net worth. These items include 529 account balances and custodial accounts. As these accounts will inevitably be used for college at some point in the future, you likely don’t want to muddy the waters and list them as an asset. Also, any stock options that are currently unvested would go here.

A couple additional items to note:

1. I recommend showing who owns each asset: spouse, joint, or by another entity like a trust. For large estates, this is important, as assets might have already been taken out of an individual’s estate and used up part of their estate exemption

2. On a separate tab, show the year over year comparison. This will be important to see how your net worth has grown each year

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You cannot control how the stock market performs, so your balance sheet may not always go up each year. However, you can control how much you save and how much debt you pay down, both of which help to increase your net worth.

After you’ve built your personal balance sheet, you’re then ready to prepare a comprehensive financial plan (mapping your journey) to ensure each dollar has a purpose instead of hoping and praying you’ll be okay in the future. If you’re unsure how to put a plan together, please feel free to reach out.

Thank you for reading!

Alex Perkins, CFP®

Last modified on Tuesday, 24 April 2018 17:44