I feel the above sketch by Carl Richards explains what we do for clients and what they can do for themselves at the beginning of our relationship so that we can work out where they are today.
When it comes to money, what we don’t know can hurt us. I’ve seen this truth play out time and again when people tell me that they want to take their finances seriously by investing and making plans for the future.
“Excellent,” I’ll say. “So, what can you tell me about your current finances?” Occasionally I have a client who is fully aware of what they have, but the most common response is a blank stare.
I’m not surprised. Sometimes we just don’t want to know. As soon as we start listing our current assets and liabilities, we come face to face with both our good and bad financial decisions.
Maybe we’ve done a great job of saving money every month, but we’ve also had a credit card balance for over a year. We need to know both the good and the bad. Otherwise, we can’t plan for the future. Getting a handle on our current reality starts with something simple: a personal balance sheet.
To start, grab a piece of blank paper. Draw a line down the middle. Write “Assets” on the left, “Liabilities” on the right. Then, make a list.
Assets are anything we own. Liabilities are any debts we owe. On the asset side, list things like savings accounts, ISA’s, Pensions and the value of a home. On the liabilities side, list things like credit card debt, a mortgage balance, and any other loans. For this process to work, we need exact numbers, especially for our liabilities. Be prepared to call credit card companies and banks if needed to get this information. Again, not knowing these numbers can hurt us.
Of course, the personal balance sheet may also reveal we’re better off than we think. That’s a good thing. We may have saved more and have less debt that we assumed. Once we have all the numbers, add them up. Then, subtract all the liabilities from the assets. This number equals our net worth and our current reality. This process seems simple enough.
The next step is however a little more complex. It needs discussion and some analysis. The “how do you get there?”; that all important middle step is where the advisor with a wealth of experience can help. However, if we keep avoiding or skipping this first step, we’ll have a difficult time figuring out where we want to go, let alone how to get there!
So if you’d like help understanding where you are now, or working out how you get to where you want to be, please do contact us.