I have been using a personal balance sheet since 1994. At the end of each year, I record the value of all my assets and liabilities. And I use a personal balance sheet with clients—the need for fancy software simply isn’t there. A personal balance sheet is the most helpful tool as it enables you to become more aware of your clients’ net worth and what impacts it the most.
When providing sales training to financial advisors, my objective is to find simple and useful tools. I use the personal balance sheet with individuals to monitor where they are currently and where they are going. It allows both the advisor and the clients the ability to decide if they will increase their net worth by increasing assets or by reducing what they owe, better known as liabilities.
A client’s net worth and liabilities fluctuate throughout their life. Below I have included ways for you and your clients to determine net worth and manage liabilities at every age.
IN YOUR 20s
Most individuals in their 20s have just finished college and have assumed loans for attending school. They have saved little and may even have credit card debt. At this time, your clients have a negative net worth, meaning their liabilities exceed their assets. With their first job post-college, they may be making significantly more money than ever before and may have the urge to spend all this money but should consider paying off debt. You can improve their net worth by pushing them to pay down the debt as fast as possible. Encourage your clients to forgo the Starbucks coffee, stay in one or more nights a week and use what they are saving to pay off the debt.
IN YOUR 30s
Clients in their thirties often get married, may have two incomes and may be considering starting a family. This is a big transitional decade. For a period of time, your clients’ net worth increases because of the dual income. They can start putting away money in their 401k or an IRA. As they welcome children, expenses increase. They may even buy a home. They may have enough for a down payment, but they may also take on a mortgage. Consequently, the surge in net worth diminishes due to the reduced savings and the purchase of the home.
IN YOUR 40s
Your client’s income has begun to rise, but expenses are high due to managing a family. Clients are thinking about sending kids to college, and it is important to make sure that they are saving and putting away more for retirement and for their children’s education. There is an urge and maybe a hurdle in wanting to spend, and they will have to be diligent in saving the money they make. Their liabilities, especially their mortgage, should be declining. At the very least, plan how the mortgage will decline and be intentional about creating a plan with your clients. Your clients can choose to pay down more debt or increase their assets. It may be prudent to pay down debt, even though this means having fewer assets for you to manage. As a financial advisor, it’s important to understand that growth in net worth is dependent on saving more than your clients spend. This may take a complete reconfiguration of how you look at saving and spending. For an alternative viewpoint, check out Mr. Money Mustache. The family lives on just $25,000, and both the husband and wife are “retired”.
IN YOUR 50s
More likely than not, these are your clients’ prime earning years. This is when clients are saving the most, but they might also have high expenses if they are are funding their children’s education. By the time they are in their late 50s, they should be accelerating their savings and, therefore, their net worth. They should have little debt. Unfortunately, leading up to 2008, people at this age, on average, were increasing their debt, which made the downturn worse.
IN YOUR 60s
By the time they reach their early 60s, clients are deciding when the right time to retire is. It may depend on when they can pay off their home or have enough saved income to pay for healthcare insurance. With any luck, the stock market and their other assets have increased in value and their net worth has increased. Deciding when they should retire may also depend on how much income they think they need and what they can safely withdraw from their investments. A common rule of thumb is to have 20-25 times the income you want for retirement saved. Your clients may be able to offset the amount with Social Security, pension or other income to lower what is needed for retirement.
IN YOUR 70s
By age 70, most individuals have chosen to retire. Most debt should be gone, which gives individuals complete freedom to choose whether or not to work. Clients’ net worth may decline in some years as withdrawals and a decline of investments may cause an overall reduction. If your clients’ net worth increases, they may consider giving away some to charities, children or grandchildren.
Some advisors may suggest decreasing stock exposure by using a rule of thumb called the “Rule of 100”. However, it may be better to start out with fewer stocks and increase the number of in their portfolio as they age. Better yet, they may also look at the valuation of the stock market and decrease stock exposure as valuations rise extremely high. Either way, this is the time that, as an advisor, you want to try and smooth your clients’ glide path of their net worth.
IN YOUR 80s
With some good investing and being mindful of some of the hazards of investing, clients may have started to deplete their net worth. A large impact may be the depletion in net worth due to health-related expenses. Of course, there are ways to reduce this impact. Overall, it depends on the client as to whether he wants to take on this expense through insurance or pay out of pocket if the need arises.
The components of your clients’ net worth change over the years. If you can help them at each juncture, you will be able to create significant value for them. Proper planning leaves your clients more prepared for the next leg in their wealth building.
Tracking a clients’ net worth and the assets growth gives you a better understanding of how well they are tracking their goals. It is not the year-to-year growth that is important, but rather the process you go through in enabling a client to reach their goals.
If you haven’t begun preparing personal balance sheets for your clients, it’s not too late to start. For more information on how to start this process, contact us today.