What are the building blocks of your wealth plan?

Posted on March 11, 2015 · Posted in Blog

3d human cube ladder greenMany 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 what are they and why are they so important?

In the 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 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.

Why do you need this information?

1. These documents illustrate your current financial situation and help identify areas that may be of concern or not meeting expectations. Too often people avoid looking at their finances because they think it’s difficult, time-consuming, or because some part of them just doesn’t want to know. However, this information forms the building blocks of your financial plan.

2. They provide a way to compare results and measure progress over time. You can’t tell if you are getting closer or farther from your financial goals if you aren’t regularly reviewing how you are doing year over year.

3. Understanding and tracking expenses is one of the biggest keys to obtaining and maintaining wealth available to you. Imagine what would happen to a business if it didn’t calculate the amount of money it was spending. Once you appreciate where your money is going, you can look for ways to save or spend more wisely.

If you don’t have these documents, how do you put them together? Our next posts will take you through the steps.