The Building Blocks of Balance Sheets

A Personal Balance Sheet or Personal Net Worth Statement is a snapshot of your financial life.  Like a photo, it represents one point in time. It is unlike a budget or cash flow statement which has a longer time frame often encompassing  several months or years.  The Balance Sheet is a fixed look at all your current assets (accounts) and liabilities (debt) and can be a useful tool  in many financial situations.  You will be asked for the balance sheet  information when applying for a mortgage on a new home or asking for a business loan or a car loan or speaking to your attorney about your estate plan.  You should be able to create your personal balance sheet  easily and update it on a regular basis. 

The assets on your Balance Sheets Assets are generally listed in liquidity order, i.e., the ease in which you can convert the asset to cash.  The first on the list are assets which are already in cash like bank accounts, savings accounts and money market funds. As the list grows, the assets are less easily converted. Fixed income investments might be locked in for a certain period like a CD.  You might have unrealized losses or gains in the stocks which make selling them less attractive.  The least liquid asset in your balance sheet is  probably your home, which can take several weeks to months to sell and convert into cash.  Here is a list of the usual order of assets and liabilities on a balance sheet in order from most liquid to least liquid.

ASSETS

1. Cash and Cash equivalents (bank accounts, savings accounts, money market funds, etc.)

2. Non-qualified Investment accounts (Individual and Joint Brokerage accounts) 

3. Qualified investment accounts (IRA, 401k, retirement plans, 403b, 457 plans, pension funds)

4. Real Assets (Home, Car, Jewelry, etc)

LIABILITIES (DEBT)

1. Mortgage on your home

2. Car Loans

3. Credit Cards

Your Personal Net Worth is then calculated by taking your Balance Sheet Assets and subtracting the Balance Sheet Liabilities.

Accounting for Foreign Currencies

Once you’ve established your initial balance sheet as a snapshot of your position, you’ll want to account for the varying currencies that may be a part of your portfolio. As US expats, there can be a number of assets or liabilities that make up your Balance Sheet from different stages of your life. For example, you may have a home in the UK but a retirement account from working in the US. Therefore, there’s the need to reconcile this in a cohesive manner between the relevant currencies to ensure you have an accurate picture of your position. Depending on the purpose of creating your balance sheet there may be designated exchange rates you are required to use. Official sources for FX rates include the following:

• Bank of England

• Euro Foreign Exchange

• Federal Reserve

Investments and Your Time Horizon

The type of investment asset you hold in each of the accounts should match your expected time horizon.  If you are accumulating assets for a short term goal like a vacation next year or a downpayment for a home in 2 years, the investments inside those accounts should also be short term in nature.  If you are saving for retirement in 20 years, your assets should be placed in a portfolio of balanced investments that will grow over time.  As you near retirement, you may want to keep assets that you expect to use in the next few years, in a more liquid investment that will have less market fluctuation so they are there when you need them.

Short term Goals

Short term goals (upcoming vacation, downpayment for a home, upcoming tuition payments) are expenses that you expect to occur within the year.  They can be invested in short term assets that  are readily available to you  such as the cash in the checking, a high yield savings account at your bank, CD or short term bond.  Everyone should keep an emergency cash fund available to cover approximately 6 months of unexpected obligations that could arise.  This will help you keep your long term portfolio invested over the market cycles.

Medium Term Goals  

Medium Term Goals are assets that you may need in the next 2 to 5 years.  Accumulated assets you plan to use for a medium term goal should be invested in a more balanced investment portfolio such as a balanced fixed income and equity portfolio.  A balanced portfolio of stocks and bonds should allow your money to grow over your medium term time horizon.  Fixed income in the portfolio should add stability to the account.  As your medium term goal becomes a short term goal, risk investments can be pared down to reduce volatility.

Long Term Goals

Long term goals include  your retirement assets that you will use in 5 years or longer.  These assets should be invested in a balanced portfolio that is oriented to growth.  This longer time horizon will allow the portfolio to withstand the volatility of the equity markets over time.  As you near retirement, you should consider stabilizing your growth portfolio and begin protecting the assets you will need over the short term.

Taxes

Cross Border tax liability is an extremely important consideration for you when taking capital gains in your portfolio or taking a tax free distribution from a pension account or Roth IRA. Each country has different rules and you will need to consult your international tax consultant for guidance. 

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