The Balance Sheet – The Map for Financial Professionals

June 30, 2020

Professional investors need to have a good grasp on the balance sheet of a business they are investing in. Having a deep understanding can inform strategy and help make the best decisions. The same goes for your personal wealth. Without a full view of your assets and liabilities, you are flying blind.

Previously, we have discussed why having an income statement is vital for both businesses and financial professionals (private equity professionals, investment bankers, and asset managers). The income statement serves as a compass, which helps to directionally guide your personal wealth decisions.

If the income statement is a compass, then the balance sheet serves as the map. Utilizing the two of these in tandem allows you to understand both the course heading and the path to get to your destination. To best navigate and utilize the balance sheet there are 3 items to consider:

  1. Know Where All Your Eggs Are – it is commonly accepted that you do not want to have all your eggs in one basket. A balance sheet is a great way of recognizing where there may be concentration risk in your personal life. It could be in company stock that is paid out as part of compensation, deferred comp, or in your primary and secondary homes. Understanding where this risk lies and having a plan in place to reduce this risk can all be driven from the balance sheet.
  1. Have Different Baskets – Just like you do not want all your eggs in one basket, you also want to ensure you have multiple baskets to hold your assets. Having different types of accounts (IRA, Roth IRA, Taxable Account) can help grow your wealth more efficiently over time. Being able to take advantage of asset placement and the different tax structures for these accounts can make a significant difference over time in achieving your goals. 
  1. Who Owns What? – if you are married, understanding how assets are titled and owned between spouses is very important. From a day to day perspective, the ownership does not matter. However, from an estate planning perspective, this can cause undue tax to be paid in the future. For example, in Illinois, there is a $4mm estate tax exemption per person that cannot be shared. By simply shifting ownership of assets you can avoid or reduce estate taxes in the future.

Navigating your own personal financial plan can sometimes feel like walking in the dark. However, with the help of your balance sheet, you can make the best possible decisions to achieving your goals. Although the balance sheet won’t give you the answers, it can certainly point you in the right direction to achieving your goals.

Matt Kocanda is a Wealth Manager at BDF and a member of the Investment Committee. The investment committee develops BDF’s overall investment strategy. Matt focuses on advising Financial Service Professionals through their complex needs – including cash flow, tax, or estate planning. Matt received an undergraduate degree in Finance from Indiana University.