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Building Blocks

What are the building blocks of your wealth plan?

Many clients are surprised when we ask them for their personal balance sheet and income statement. If you don’t have one, then join the club. A lot of people have never put one together and some don’t even know what they are.

Your balance sheet and income statement are the two cornerstone pieces of information needed to produce an accurate and useful wealth plan tailored to you. So if you don’t have these documents how do you put them together?

What is your net worth?

Your Balance Sheet

Let’s start with the balance sheet. In simplest of terms, your balance sheet shows your assets and their values listed on one side and your liabilities (the amounts you owe somebody) on the other side. The difference is your net worth.

Your assets can be broken down into several categories:

1. Cash and cash equivalents: This includes your cash on hand, bank accounts, CDs and any brokerage accounts that have money market accounts. You can get their values from your most recent statement (either in print or online) or call the institution where the cash is held and ask them for the figure.

2. Notes and accounts receivables: These are moneys owed to you. Most often this occurs in a business setting; however, it also includes personal loans you expect to be repaid.

3. Investments: Stocks, bonds, mutual funds, retirement accounts, annuities, real estate investment trusts (REITS), partnerships, etc. should be included here. Again the values can be determined from your print or online statements. Some interests may be more difficult to value so you can call the place where the investment is held or your advisor or CPA for help.

4. Real Estate: This includes your primary and vacation homes (house, condo or co-op), rental or investment properties, vacant land, etc. Since these are more difficult to value, contact your real estate agent, attorney or CPA for assistance.

5. Life Insurance: Here you need to determine the death benefit on the policy and whether it has a cash value you can borrow on or withdraw. If you’re not sure, ask your agent.

6. Your business interest: Do you own an interest in an active business? This too should be valued. It is one of the more difficult assets to value and many people just include the amount they would sell it at if offered that amount. Ideally, look to your attorney, CPA or a business evaluation for guidance.

7. Collectibles: Artwork, cars, stamp collections, rare coins, gold, etc. should be listed. Again these can be very difficult to value and help can be found with appraisers, attorneys and CPAs.

8. Miscellaneous assets: These are items not listed above that can be sold for some value such as jewelry, a car, furniture, etc. Appraisers can help with the valuation or a rough guess of what you would sell them for is a starting point.

Next we move to the liabilities side of the balance sheet. Liabilities consist of a mortgage (the amount still owed), rent, credit card bills, insurance, utilities, taxes, car loans, student loans and personal loans as well as any other amount owed by you.

The amounts owed can be found on your bank and credit card statements or calling your lender directly.

Once you know your assets and liabilities, your net worth is the difference between the two.

You should prepare your balance sheet no less than once a year (at year end is typical). Whenever you update your balance sheet you should be comparing it to the last time in order to track how you are doing and whether you are allocating your assets correctly. Your financial advisor can help with this.

There are many software packages you can buy or download to help you produce a balance sheet. Many people just use Excel or go old school with pencil and paper. The important thing is actually putting it together so you can begin to truly understand your finances.

How much money are you bringing in and spending every month?

Your Income Statement

Once you have a balance sheet, the next crucial building block in creating a wealth plan is preparing your income statement. The income statement is your cash flow analysis. It looks at the money coming in and going out. The difference between a balance sheet and income statement is like looking at a photo vs. a video. The balance sheet is a snapshot capturing a certain moment in time. On the other hand, the income statement is more like a video showing you what’s happening every month over time.

What comprises your personal income statement or your cash flow analysis? The first piece is your income or revenue; the second is your expenses.

Your monthly income includes your pay from work, interest earned on cash accounts, dividends and capital gains from investments, interest earned from any personal loans you made, rent you receive from others and any other items that add to your cash account.

The best way to determine pay from your job is from your pay stubs or looking at the amount you take out of your business to pay yourself. Interest on accounts, dividends and capital gains are found on your monthly statements or online account information. Interest on personal loans and rent are taken from the checks you receive or by reviewing your savings and checking accounts.

What about figuring out your expenses? Most people know the big items they have to pay, but they don’t really track every expense because they think it’s difficult, time-consuming, or because some part of them just doesn’t want to know. However, tracking expenses is one of the biggest keys to obtaining and maintaining wealth that we have available to us. Imagine what would happen to a business if it couldn’t calculate the amount of money it was spending. If it’s a disaster for a business not to know, why would you think it’s different for you?

Your expenses should be broken down into two categories: fixed and discretionary.

Fixed expenses are those that need to be paid in order for you to survive (not your double latte every morning). Fixed expenses can be further broken down into fixed amount expenses – meaning they will be the same amount every period, and variable fixed expenses which are expenses that must be paid but may be different every month. For example:

Fixed amount expenses include your mortgage, rent, real estate taxes, insurances (auto, life, disability, homeowners), bank loans, personal loans, support payments, etc.

Variable fixed expenses are things like basic food, heat, gas, electricity, telephone, essential clothing, income and other taxes, medical bills (doctors, prescriptions), car and transportation, repairs and maintenance.

Discretionary expenses are everything else you spend money on including entertainment, vacations, education, discretionary clothing, eating out, charitable contributions, recreation, health and beauty care, gifts and incidentals.

There are many online programs you can utilize or simply use an excel spreadsheet or pencil and paper. To figure out your expenses, review your checkbook, credit card statements and receipts for cash purchases every month.

By tracking your income and expenses on a monthly basis over the course of a year, you will gain a clear picture of where your money is going and how you might be able to save more in order to achieve your financial goals.


Learn more about how we can help you build and preserve your financial home.

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