![]() Over time, you should seek to have more cash-producing assets than cash-consuming assets.ģ. Can your cash-consuming assets be reasonably maintained by your cash flow?Ĭ. What is the proportion between the two?ī. How many of your assets are cash-producing (savings, investments) and cash-consuming (personal real estate)?Ī. How many days or months of expenses do you have in cash?Ģ. Debt used to finance productive, long-term endeavors (real estate, education) can be instrumental in building long-term wealth.Īfter building the balance sheet, determine the strengths and weaknesses of your financial position by asking:ġ. Accumulating debt for the purpose of maintaining a lifestyle or acquiring status symbols can lead to financial stress. Credit card debt is an example of a current liability while mortgages, student loans, and car loans are examples of long-term liabilities. Liabilities, or debts, are broken into two primary categories: current (due in 12 months or less) and long-term. Conversely, real estate creates the prospect for long-term growth but often requires taking on debt, can be costly to maintain (property taxes, maintenance, etc.), and is illiquid. cash) is used to pay current bills or cover unexpected expenses, costs very little to maintain, and is quite liquid, but offers no growth nor much income. ![]() Understanding these characteristics allows one to better evaluate the risk and return possibilities for the assets, both individually and in total. Assets are listed from most liquid (easiest to convert to cash) to least liquid whereas liabilities are listed from those requiring earliest repayment to those due later.Įach asset category has a distinct combination of characteristics including purpose, liquidity, tax profile, cash flow, and time horizon. Asset types include cash and cash equivalents, investment portfolios, retirement accounts, real estate, and business interests. Understanding Assets & Liabilities – The Balance SheetĪ balance sheet identifies your assets (what you own) and liabilities (what you owe). To determine the strengths and weaknesses of your financial position, create your personal financial statements (a balance sheet and a cash flow statement). For example, if you are planning to buy a house in the near future, but then instead buy an expensive car that consumes large amounts of disposable income, you are showing a clear inconsistency between goals and actions.īefore creating a plan, one must know where they are starting. By understanding the economics of choices you make, you can ensure your decisions are consistent with your rank order of goals. While one individual may want to own a home as soon as practical, another may want to start a family and ensure education is well funded. What goals are you willing to compromise, if necessary, to achieve higher goals? There is no one correct order of desires. Planning for future aspirations is essential, but simplicity is key.įirst, prioritizing goals is a practical starting point to force us to rank what is most important. When you are establishing your career, starting a family, managing various debts, or buying a home, it becomes important to find time to enjoy life. Where do you see yourself in 20 years? As you head into your 30s and 40s, life becomes complicated. ![]() The next note will focus on savings & investing, and the final one on risk management & estate planning. ![]() Given the increasing complexity of planning for this age group, we are breaking down the series into parts with this section focusing on understanding personal financial statements and budgeting. The second part of that series focuses on planning for 30 – 40 year old individuals who are in the early to mid-stages of their careers. In December 2014, we published a paper titled “ Financial Foundations for the Next Generation” as the first note in the series. For a printer-friendly version, click here.Īs advisors, we place a high level of importance on financial planning which encompasses many aspects of life, including budgeting, retirement planning, education planning, risk management and estate planning.
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