Download Week2.1 Balance Sheet - B-K

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
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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
• 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
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Factors Affecting The Balance Sheet
• Cash flow
– How?
• Your age
– How do you expect your net worth to change over time?
• Your lifestyle
– How?
• Time
– Value of asset can go down
– Examples?
• Economic conditions
– Value of asset can go up
– Examples?
Analysis
• Liquidity Ratio
= 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
1x
40
2x
45
3x
50
4x
55
5x
60
6x
65
7x
67
8x
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
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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