Personal Finance Balance Sheet Bill Klinger

Personal Finance Review Sources of cash inflow Disposable income Sources of cash outflows Savings rate Factors affecting cash flow

Personal Balance Sheet Assets Assets - Things you own Types of assets Liquid (current) assets Household assets (long-term) Investments Stocks Bonds Mutual funds Real estate

Personal Balance Sheet Liabilities Liabilities – things you owe Do NOT confuse with expenses!! Types of liabilities Current Bills Credit cards Long-term Loans Mortgage

Personal Balance Sheet Assets Things you own Liabilities Things you owe Net worth Assets – Liabilities What’s your net worth?

Balance Sheet Assets Liquid Assets Checking Household Assets Home Investment Assets Stocks . Total Assets Liabilities & Net Worth Current Liabilities Credit card balance Long-Term Liabilities Mortgage . Total Liabilities . Net Worth

Factors Affecting The Balance Sheet Cash flow How? Your age How do you expect your net worth to change over time? Your lifestyle Time Value of asset can go down Examples? Economic conditions Value of asset can go up

Analysis Liquidity Ratio Debt ratio Savings rate = liquid assets / current liabilities Want to be > 1 Debt ratio = liabilities / assets Want to reduce over time Savings rate = savings / disposable income Target 15-20%

On Track? Age Savings Target 30 .5 times current salary 35 1 x 40 2 x 45 3 x 50 4 x 55 5 x 60 6 x 65 7 x 67 8 x Source: Fidelity Investments

On Track? Calculate age x pre-tax income x .10 Prodigious Accumulator of Wealth (PAW) Average Accumulator of Wealth (AAW) Under Accumulator of Wealth (UAW) Example: age 50, income $50,000 is an AAW if they have saved $250,000. Source: Thomas Stanley, The Millionaire Next Door

Net Worth by Age Source: U.S. Census Bureau

In Class In groups of two create a balance sheet to determine this person’s net worth Owes $500 on credit card Has $20,000 car Owns $300,000 house with $200,000 mortgage Has $5000 in furniture and electronics What is this person’s debt-to-assets ratio?

In Class In groups of two, determine the impact on the cash flow statement and balance sheet of: You buy $200 in furniture and pay with your credit card You buy a house for $500k, putting $100k down and getting a mortgage for $400k You owe $300 on your credit card and pay it off by writing a check from your bank The housing market goes up and your house is worth $50,000 more Your landlord gives you a bill for $2,000 in rent that you haven’t paid Your borrow $5,000 for tuition You go out to eat and spend $50 In groups of two Create a simple budget with one or two problems Exchange with another group and find problems