CHAPTER 4 ASSETS, LIABILITIES AND NET WORTH What is the current state of your financial fitness? EZ-$-PLAN's template file NETWRTH helps you assess your status with respect to the main categories of personal finance, including: liquid assets, long- term assets, real estate ownership, insurance, investments, savings for college education and retirement. Using NETWRTH, you can organize your financial affairs by preparing a personal balance sheet. This balance sheet is a statement of your personal assets, liabilities and net worth. Net worth equals assets minus liabilities. If you apply for a mortgage or a business loan, the bank asks you to supply your income and expense information as well as your personal balance sheet information to be sure that you will be able to pay off the loan. Shouldn't you also have this data well organized so that you can assess your ability to handle the monthly indebtedness? Many people like to use NETWRTH to indicate progress towards their long- term goals. Just as the government's budget reveals where its priorities really are, doesn't your balance sheet reflect your condition and priorities? Use NETWRTH to help you plan your financial affairs so that you may meet as many of your financial priorities as possible. Let us examine a sample balance sheet prepared by Bill and Hope Planner (see table 4.1). ASSETS Bill and Hope use NETWRTH to organize their assets using the following categories: liquid (current) assets, marketable assets, long- term assets, real estate assets and other assets. Liquid assets include checking and savings accounts and money market accounts. Marketable assets include stocks, bonds and mutual funds. Long-term assets include those assets that cannot or you choose to not spend for the near term, such as IRAs, Keogh funds, retirement funds, trust funds and long-term saving funds. Marketable, and long-term assets are usually very easy to appraise. Just look up your account value in your latest statement or look up the value of your mutual fund shares in the newspaper. We recommend using current market value for determining value of an asset. For example, if the market value of the BZ Petroleum stock that you purchased last year has changed in value from the purchase price, list the current market value. The market value of financial, real estate, collectables and business assets usually appreciate over the long term. 21 Chapter Four Table 4.1. Assets, Liabilities and Net Worth 2 (NETWRTH) Latest update: May 30, 1988 3 Name: Bill Planner 4 Hope Planner 5 ----------------------------------------------------------- 6 ASSETS VALUE($) PERCENT(%) 7 ----------------------------------------------------------- 8 LIQUID ASSETS 9 Cash/Checking Accounts 3,800 1 10 Savings/Money Market Funds 23,000 4 11 US Savings Bonds 1,000 0 12 Brokerage Accounts 3,000 0 13 Life Insurance-Cash Value 0 14 Other 0 15 Total Liquid Assets 30,800 5 16 ----------------------------------------------------------- 17 MARKETABLE ASSETS 18 Common Stocks 5,245 1 19 Mutual Funds 15,245 2 20 Corporate/Municipal Bonds 5,375 1 21 Certificates of Deposit 10,000 2 22 Other 0 23 Total Marketable Assets 35,865 6 24 ----------------------------------------------------------- 25 LONG-TERM ASSETS 26 Pension Funds 91,638 15 27 IRA/Keogh/401k 11,339 2 28 Trust Funds 6,750 1 29 Income Savings Plan 45,675 7 30 Investment Real Estate 120,000 19 31 Tax Sheltered Investments 2,500 0 32 Other 0 33 Total Long Term Assets 277,902 45 34 ----------------------------------------------------------- 35 PERSONAL REAL ESTATE 36 Residence 140,000 23 37 Lot/Vacation Home 75,000 12 38 Total Personal Real Estate 215,000 35 39 ----------------------------------------------------------- 40 OTHER PERSONAL ASSETS 41 Home Furnishings 35,000 6 42 Automobiles 10,000 2 43 Collectables/Jewelry 2,000 0 44 Business Assets 5,000 1 45 Other 10,000 2 46 Total Other Personal Assets 62,000 10 47 ----------------------------------------------------------- 48 TOTAL ASSETS 621,567 100 49 =========================================================== 50 LIABILITIES 51 ----------------------------------------------------------- 52 CURRENT LIABILITIES 53 Credit Cards 500 22 Chapter Four (Table 4.1. continued) 54 Short Term Loans 1,500 55 Other Current Liabilities 0 56 Total Current Liabilities 2,000 57 ----------------------------------------------------------- 58 LONG-TERM LIABILITIES 59 Mortgages on Personal Real Estate 65,000 60 Mortgages on Investment Real Estate 75,000 61 Bank Loans 0 62 Margin Loans 0 63 Other Loans 0 64 Estimated Tax Liabilities 500 65 Total Long-term Liabilities 140,500 66 ---------------------------------------------------------- 67 TOTAL LIABILITIES 142,500 68 ASSETS-LIABILITIES (NET WORTH) 479,067 69 ========================================================== To appraise the value of your real estate assets, look in the real estate section of the local paper to get the asking prices of property currently on the market. It is usually not too hard to do your own comparative market analysis, compare location, size, amenities and price of homes similar to your own. Asking prices are often higher than actual prices, so you may want to determine comparable actual selling prices. If you have business equity, what could you sell your interest in the business for? It is somewhat more difficult to put a value on personal assets. For your car you can check asking prices of vehicles of similar age and condition in the newspaper. The market value of furniture and clothes is usually deeply discounted from the original purchase price. Clothes, furniture and automobiles are usually not good financial investments, but are necessary or enjoyable consumer items. Personal assets, such as automobiles, furniture and clothes, generally depreciate with time. Current Asset Details Table 4.2 lists specific financial instruments that make up Bill and Hope Planner's portfolio. Bill and Hope organize their assets into liquid assets, marketable assets, IRA accounts, retirement accounts, and life insurance. The Planners' life insurance is term insurance with no current cash value. Table 4.2 shows important asset details such as name of institution, institution's phone number, account number and current value of individual securities. LIABILITIES NETWRTH (see table 4.1) categorizes liabilities as: current liabilities and long-term liabilities. Current liabilities include short-term bills owed such as: credit card, rent, mortgage, household and consumer items. Long-term liabilities may include mortgages and notes due. 23 Chapter Four Why should mortgages owed be counted as a long-term liability? Each month when the mortgage payment is due, the bill becomes an immediate debt to be paid out of current assets. Looking at the mortgage from the longer-term prospective, it is the present value of the mortgage that is owed. If you sell the house, it is only the current balance of the mortgage that must be paid. ANALYZING THE PLANNERS' BALANCE SHEET Let us analyze Bill and Hope Planner's balance sheet (table 4.1) and see what we can learn. First, do the Planners have sufficient liquid assets? The Planners have about $30,000 in liquid assets. This is about four times their combined monthly income. Many financial planners recommend that about 3- to 6-months' income be reserved in current readily available assets in case of a financial emergency. The Planners have sufficient liquid assets. Bill and Hope ask themselves questions about their balance sheet such as the following: * Do we have sufficient assets placed in long-term financial instruments such as retirement accounts, IRA's, and income savings accounts given the number of years we have to retirement? * Do we have enough assets placed in trust or college funds for the kids given the number of years they have before entering college? Are we satisfied with our current home and with the contribution it makes to the growth of our net worth? Is our house market value properly appraised? Do we have the right amount of equity in our primary residence, given the amount of home enjoyment, appreciation and tax benefits that we expect? Is the mortgage amount about right given our income and deductions to take best advantage of interest rate tax deductions? * How much of our total assets should be in investment real estate (based on an analysis of equity rate of return and comfortable debt ratio - see real estate investment chapter)? * How much of our assets should be invested in personal business endeavors? * How high should we allow our current liabilities to get? (Usually this is kept low since credit card interest rates are high.) * How large is our net worth? How fast is it growing? What portion of our assets have contributed the most to increasing our net worth, e.g., personal or investment real estate, personal business, financial assets? Should we increase our investment in those assets that are contributing the most to net worth growth? You may want to track your balance statement over time to see the progress you make in increasing your net worth and other categories. One good way to do this is to update the data in your balance sheet periodically, say annually, and to save the old and the new file. You might use filenames NETWRTH2, NETWRTH3, etc. to keep new files separate from the master NETWRTH file. Later you can compare these reports and decide if you are making the kind of progress you like to or can make. 24 Chapter Four Table 4.2. Supporting Assets Schedules Latest update Nov. 26, 1986 ------------------------------------------------------------------- Name of Institution - Account Number Phone Value ------------------------------------------------------------------- LIQUID ASSETS First Fidelity - 705897 609-234-5678 3,800 Fidelity Money Fund - 77865 800-567-4432 23,000 Series E Bonds ($50 each) 1,000 Fidelity Brokers (FB) 800-567-4432 3,000 Total Liquid Assets 26,800 =================================================================== MARKETABLE ASSETS IBM-FB 800-567-4432 5,245 Fidelity Magellan - 95864 800-567-4432 5,245 Fidelity OTC - 97834 800-567-4432 10,000 NYC '80 Bonds - FB - 98654 800-567-4432 5,375 CD - Commerce Bank 609-234-5555 10,000 Total Marketable Assets 35,865 =================================================================== IRA ACCOUNTS NAME-ACCOUNT NUMBER HELD BY PURCHASED COST VALUE ------------------------------------------------------------------- Delaware Charter-98654 Hope 4/14/85 2,000 2,792 Fidelity Overseas-98076 Bill 4/14/86 2,000 2,162 Fidelity Magellan-87634 Bill 3/24/83 2,000 4,025 CD - City Bank Hope 3/24/83 2,000 2,360 Total IRA Accounts 11,339 =================================================================== RETIREMENT ACCOUNTS ------------------------------------------------------------------- Great American Life Hope 22,000 Income Savings Bill 44,638 Company Retirement Bill 15,000 Company Retirement Hope 10,000 Total Retirement Accounts 91,638 ------------------------------------------------------------------- LIFE INSURANCE ------------------------------------------------------------------- Insurance Co.- Beneficiary Insured Face Amount Prudential - Bill Hope 81,000 The Equitable - Hope Bill 325,000 ------------------------------------------------------------------- SETTING UP YOUR OWN BALANCE SHEET Use the EZ-$-PLAN file NETWRTH to set up your own balance sheet. To set up your own file do the following: (1) Boot-up your PC. 25 Chapter Four (2) Change Directory: Enter C:CD\ASEASY Ret. (3) Load AS-EASY-AS: Enter ASEASY/P/CTR Ret. (4) Load NETWRTH file: Enter /FR Ret. Move cursor to METWRTH FILE, Ret. (5) Enter the data (both text and numbers) in the appropriate cells by moving the cursor to the cell, type the information and press return. (6) NETWRTH will automatically add up totals such as total assets, total liabilities and net worth. More importantly, NETWRTH gives you a quick start by setting up the format and major categories, but you can add additional categories by entering new rows of data as you require. What should your balance sheet look like at a given stage of your life? This is a personal lifestyle question. Missionaries and Wall Street yuppies will certainly have different balance sheet priorities. We suggest that you review chapters such as planning your life's goals, planning for children's education and planning for retirement and then come back to your income and expense and balance sheet statements to consider what adjustments might be desirable or necessary.