2024 Q1 Market Commentary
The Power of a Personal Financial Statement:
A Brief Personal Journey
Over the past 23 years, I have maintained a personal financial statement, diligently updating it on the 1st of each month. This practice has enabled me to meticulously track my assets and debts, providing invaluable insight into my financial standing. Initially, it served as a simple record-keeping tool, allowing me to monitor the performance of my investments and liabilities over time. As I continued this routine, it not only provided a sense of control during economic fluctuations but also offered a reassuring perspective amid life's challenges.
Initially, my approach was straightforward—Each month I reviewed my various assets and debts, updated the values in my Excel spreadsheet and stored them on an external hard drive. My primary purpose, in those early years, was to have an updated profile for banks in the event I needed a loan or line of credit. However, as the habit solidified, it evolved into a source of perspective and tranquility during turbulent economic climates or personal hardships. Knowing my financial stability extended beyond, and was not entirely subject to, stock market fluctuations brought a sense of calm. Whether navigating downturns or celebrating successes, my personal financial statement served as a tangible measure of progress and a reminder of diversified assets beyond stocks.
Recognizing its utility beyond personal tracking, I discovered its effectiveness as an estate planning tool. By outlining actions and necessary information for trustees and beneficiaries, I created a comprehensive guide to assist in the management of my assets in the event of my passing. This led to the development of a "survivor's balance sheet," tailored to increase liquidity and simplicity for my spouse, Lara, in my absence, or for our children in the event something would happen to both of us.
Subsequently, I formalized these intentions through a written letter to trustees, enhancing clarity beyond legal documents. Engaging Lara and other stakeholders - including my children and business partners - in discussions further ensured understanding and alignment with our financial plans and family values. Regular meetings now occur every six months, usually over a family dinner, fostering transparency, encouraging questions and new ideas, and even collaborating on philanthropic and investment endeavors within the family.
My journey underscores the transformative power of a personal financial statement. Beyond its role in financial management and estate planning, it fosters familial cohesion and peace of mind. I encourage everyone to create and maintain a personal financial statement, emphasizing its multifaceted benefits beyond mere financial tracking.
Here are a few tips to consider:
It is not important to update monthly. Quarterly or semi-annually is enough to build a habit and stay current.
It is not imperative to have a complex or large estate. Every person has some assets, and likely also some debts. Start tracking them even if you are just starting to save or borrow.
If you already maintain a Personal Financial Statement consider leveraging the habit into an estate planning activity and communicating with stakeholders like beneficiaries and trustees.
Create a scenario that would adversely impact a person(s) you care for, and then run a “stress-test” writing down necessary actions to convert your PFS into a version that is better for them.
Balance Sheets: Corporate and Personal
A corporate balance sheet and a personal financial statement both provide a snapshot of an entity's financial position, but they differ in scope and components.
Differences:
Scope: Corporate balance sheets represent the financial position of a business entity, including assets, liabilities, and equity. Personal financial statements reflect the financial position of an individual, typically including assets, liabilities, and net worth.
Complexity: Corporate balance sheets are usually more complex due to the inclusion of various assets such as property, plant, and equipment, as well as complex liabilities like long-term debt and contingent liabilities. Personal financial statements tend to be simpler, often comprising assets like savings, investments, and real estate, and liabilities such as mortgages, loans, and credit card debt.
Regulatory Requirements: Corporate balance sheets are subject to regulatory requirements and accounting standards (such as GAAP or IFRS), ensuring consistency and transparency in financial reporting. Personal financial statements are not typically subject to regulatory requirements, though lenders may have specific formats they prefer for loan applications.
Similarities:
Purpose: Both documents serve to provide an overview of an entity's financial health and can help stakeholders assess its solvency, liquidity, and overall financial stability.
Components: Both statements include assets (what is owned), liabilities (what is owed), and equity or net worth (the residual interest after liabilities are subtracted from assets).
Usefulness: Both statements are useful for decision-making, whether it's for investors assessing the health of a company or individuals planning their financial future.
Understanding the Personal Financial Statement: A Professional Perspective
The personal financial statement bears striking resemblance to its corporate counterpart—the balance sheet. Comprising three key components, it includes assets, liabilities, and net worth (or net equity), calculated as assets minus liabilities. This structure mirrors that of a corporate balance sheet, where assets equal the sum of liabilities and equity, hence the term "balance" in balance sheet.
Those familiar with financial modeling have likely encountered the personal financial statement. Unlike mere snapshots of a portfolio of securities, it captures a broader spectrum of assets, including real estate and other valuables. This comprehensive approach ensures a thorough understanding of one's financial standing and facilitates informed decision-making.
Crucially, investment decisions should be contextualized within the framework of the entire balance sheet, rather than solely focusing on public securities portfolios. While stocks and bonds may address market-related risks, overlooking additional risks associated with private investments, stock options, real estate holdings, or collectibles can be detrimental. Each asset class presents unique risks and rewards, necessitating their incorporation into overall asset allocation strategies.
In practice, the public securities portfolio often complements the broader balance sheet. Being more liquid, it offers flexibility compared to less liquid assets like real estate or collectibles. Therefore, optimal asset allocation requires careful consideration of each asset's characteristics and alignment with broader financial objectives.
In essence, grasping the nuances of the personal financial statement empowers individuals to make sound financial decisions that encompass the entirety of their assets and liabilities. By adopting a holistic approach to financial management, individuals can mitigate risks, optimize returns, and gain confidence in their financial well-being.
In conclusion, integrating a personal financial statement into one's financial management practices is not merely prudent but essential. It empowers individuals to navigate life's uncertainties with clarity and ensures a smooth transition of assets to beneficiaries. By embracing this tool, we prioritize informed decision-making, familial well-being, and long-term financial security.
If you are interested in starting or further developing a personal financial statement or survivor’s balance sheet, and want help walking through the process, contact us and we will go through this important activity together.
*The foregoing content reflects the opinions of Van Hulzen Asset Management DBA "Van Hulzen Financial Advisors" and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.