Financial Basics

BALANCE SHEET:

Did you know you have a lot in common with a corporation?  Just like a corporation you have a balance sheet.  If you haven’t already put your balance sheet together, we will help you put it together.  It is a very useful financial statement.  It can help with a lot of financial discussions and planning in the future.

There are 3 major sections of a balance sheet:

ASSETS:   Things you own that have value and can be exchange for cash.

LIABILITIES:  Debts or invoices you owe others and are personally responsible for.

EQUITY (Net Worth):  The remainder of your Assets less your Liabilities.

The simple balance sheet equation:     Asset  =  Liabilities + Equity

Statement of Cash Flow. 

If the balance sheet is the most important financial statement the statement of cash flow is the second most important. This statement simply summarizes the cash in (sources)  and the cash out (uses) each year

Of course, the goal is to have more cash coming in than going out.  But, there can be years where more cash goes out then comes in.  At these times, there are tax planning opportunities to be reviewed.

There are different Sources of Cash and Uses of Cash.

Sources of Cash:

  • Job
  • Investment Accounts
  • Pensions
  • Rental Income
  • Inheritance

Uses of Cash:

  • Mortgage
  • Taxes
  • Insurance
  • Entertainment
  • Car Payments
  • Health care
  • Credit cards
  • Utilities

STRESS TESTS

Life is a journey, and many times we don’t know how things are going to turn out.   Not everything goes our way.  Whether it be a car accident, or a health issue, the unexpected can happen.   We will apply stress tests to your financial plan and review the results with you.

3 basic Stress Tests:

  • Market Downturn.
  • Early Death of one spouse.
  • Long-Term Care event (nursing home).

RISK CAPACITY (Investments)

Once we have put together your balance sheet, estimated your cash flows, understand your insurance coverages, and apply some simple stress tests, we create your Risk Capacity. 

Risk Capacity is a financial metric that provides your advisor with a good idea of the amount of investment downside risk you can absorb without being required to sell the investment at the wrong time.

Investing is the art of getting paid for the risk you are taking in the investment market.  We help you calculate and understand the downside risk in your investments, then discuss how much investment risk you can absorb (capacity) and how much you are willing to take (tolerance).    

Risk Capacity components:

  • Balance Sheet - Score
  • Insurance Coverage   - Score  (stress tests)
  • Cash flow – Score

Do we/I have the following:

  • Emergency fund of 6 months salary?
  • Do I have a budget and am I sticking to it?
  • Am I contributing to my available retirement funds at the maximum amount?
  • Have I started a college fund for my kids?
  • Life Insurance, what if something happens to me?
  • What if I become disabled, do I have coverage?
  • Will I receive Social Security?
  • What about taxable income in retirement, do I have a Roth IRA?
  • Do I understand my investments, and the risk associated.
  • Am I doing my own taxes, or do I pay a professional?
  • What happens if I die, do I have a will, trust, healthcare directive and Power of attorney?
  • Should I refinance my mortgage?

FINANCIAL CHECKLIST:

  • Most recent Social Security statements (green and white statement) or log on to ssa.gov to retrieve information
  • Statements from any pensions
  • Statements from any employer-based retirement accounts (ie. 401K)
  • Statements from any investment accounts, including IRA accounts
  • Statements from any bank accounts (other than primary checking)
  • Statements from any annuities
  • Pay Stubs
  • Most recent tax returns
  • Statements from any consumer debt
  • Mortgage statement
  • Copies of any life, disability, long-term care, or longevity insurance policies