Now that you have gathered all of your financial statements and information about your other assets, you can begin to build your Balance Sheet.
The balance sheet consists of a list of all of the things that you own, cash accounts, investments, businesses, retirement accounts, your home and personal property. These are referred to as your Assets.
Another section of your balance sheet consists of your debts whether they be credit cards, mortgages, student loans, etc. These are known as Liabilities. When Liabilities are subtracted from your Assets, what remains is your Net Worth.
Balance Sheets can be structured many ways depending on your needs. When designing a comprehensive plan, I recommend that the balance sheet be structured as illustrated below.
(click on picture for a better view)
Notice how I group categories of assets: Cash, Marketable Securities, Annuities, Qualified Plans, etc. When structuring this, I am thinking about how I am going to model the Asset and Cash Flow projections later on. With this in mind, I want to group like assets together.
For example, in the cash section, I will include all cash accounts including checking, savings, CDs and other cash equivalents. Generally, these assets will throw off some interest income but probably will have no growth.
Marketable Securities will generally grow at an assumed rate and will throw off a percentage of dividend income. Since dividend income is taxed differently than interest income, we want to be sure that we segregate these cash flows so it is best to keep marketable securities in their own section.
The same holds true for the other categories. Annuities grow tax-deferred and distributions are taxed by formula.
Other assets such as your home and personal items should also be included on the balance sheet. This is especially true if you are a high net worth individual. Failing to include pieces of art, furniture, collectibles and other potentially valuable objects might result in your underestimation of your estate tax liability. Having a complete inventory of your assets can also help you when working with your home owners insurance.
You can structure the Balance Sheet in any way that makes sense to you. When I am working with a Retirement or other Investment-related plan, I will create Balance Sheet Sections to reflect the client's Asset Allocation; i.e., Large Capitalization Stocks, Small Capitalization Stocks, Long Term Bonds and so forth.
Asset Assumptions
To make the modeling of assets and cash flows easier, you will want to make assumptions about the growth rate, income distribution, dividend distribution, tax-free income distribution and, if you have a database to rely on, the standard deviation (risk level) of each asset. I will discuss more about projection modeling in the ProForma Section.
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