We’ve discussed the value of having a job description assigned to each of your accounts. Once this process is completed, you may begin assembling your balance sheet. Your balance sheet should list all accounts as well as items which you own and owe. Assets you own may include your bank accounts, retirement accounts, vested stock, your home and auto(s). Items for which you owe money are known as liabilities. These tend to include your home mortgage, home equity lines of credit, automobile loans, and credit card debt. Add up the assets and subtract the liabilities to calculate your net worth.
The key to long-term financial success is to grow assets and shrink liabilities over time. Success won’t happen overnight. Reviewing your balance annually takes discipline, but the rewards are great. Here’s the good news: At Flowerstone Financial, we update your balance sheet each year, typically during our January to May client reviews. This review often proves very helpful when it comes to the success of your plan. Good psychic energy comes from looking back over the years to see how far you and your family have progressed. Perspective is a helpful tool as you reflect on your journey. The net worth number is not as important as where the values are, relative to your plan and the first use of the money.
Where your monies live is also important to your plan. We like to see tax diversification in our client’s plans and balance sheets. Tax diversification is accomplished by owning investments in different tax environments such as pretax, after tax, and Roth. For example, you may have pre-tax 401k retirement dollars. These dollars aren’t taxed at the time you contribute but are taxed when funds are withdrawn. After tax investments are different. These accounts are typically subject to capital gains based on your tax bracket. We are fans of using low cost and efficient exchange traded funds (ETFs) as part of this strategy. Finally, Roth 401ks, Roth IRAs, and ROTH Thrift savings plans are taxed today before contributions are made. Growth and earnings may compound and be distributed tax-free for retirement income. Our strategies look at various approaches so you know what to expect, and when, from each account.