The Importance of Household Balance Sheet Planning

By Ranga Srinivasan and Ramprasad Satagopan

Balance sheet planning at the household level can aid in better decision-making and goal-setting, leading to a family’s ideal financial future. This planning entails a comprehensive analysis of assets, liabilities, income, expenses, and taxes. This process allows families to plan for goals like retirement, gifts to children, lifestyle choices like a vacation home purchase, and legacy goals like philanthropy. Tracking financial progress over time can lead to increased financial stability, reduced stress, and an overall enhanced well-being. This is why it is important to create a balance sheet, keep it current, and periodically take corrective action as needed.

What Does a Personal Balance Sheet Look Like?

Key elements in a balance sheet should include assets, liabilities, and cash-flow items. 

• Assets encompass everything owned that holds financial value, such as cash, savings, investments, property, vehicles, and other valuable possessions. 
• Liabilities are items like mortgages, insurance premiums, and car financing. 
• Cash-flow items include income, expenses, and taxes.

Creating a view at the household level for these categories is essential for creating robust financial plans. 

Let’s look at a simple example.

Table 1: A Basic Balance Sheet

A household balance sheet can help the family set actionable goals to increase their net worth by growing their assets while reducing their liabilities over time.

What Are the Elements of a Detailed Balance Sheet?

Beyond just the account-level views, a balance sheet can include details such as: 

• Investments: Asset allocation is a percentage allocation to stocks, bonds, real estate, and other hard assets. This is the most important determinant of wealth accumulation, hence maintaining a current view allows families to maximize their wealth over time.
• Taxation: Taxes are often a drag on investment growth. Frequent trading can create taxable events. Even when there is no action on the investor’s part, dividend, and capital gain distributions can result in taxation. Having a bird’s-eye view of the taxation and holding tax-inefficient instruments in tax-protected accounts can help minimize the tax drag.
• Cash Flow: This includes analysis of salaries, investment income, and expenses. For families in their working years, it is important that income exceeds expenses. For retirees, it is important to have an investment portfolio that can support cash-flow needs so they won’t outlive their assets.

Now let’s analyze the investment details further, shall we?

Table 2: Account View for John and Jane Smith Portfolio

By categorizing investments into major asset classes like stocks, bonds, and cash, one gets a better picture of the investment allocation at the household level. 

Viewing this as percentages, one can arrive at an allocation summary as follows:

Table 3a: Allocation View for John and Jane Smith Portfolio

The allocation here points to a high level of risk that is not visible when viewing each individual account statement. The next step is to estimate how such a portfolio can perform over the medium term (5-10 years) and knowing how much it can drop during difficult market conditions, like the COVID-19 crisis, for example. Using available institutional data, a forward-looking estimate can be determined. We can also add tax implications to this to arrive at an annual tax burden for the household. 

Table 3b: X-Ray Analysis for John and Jane Smith Portfolio

How Can This Be Actionable? 

From Table 3b, John and Jane’s family portfolio has an expected return of 6% per year with a max drawdown of -24%.  Will such a portfolio meet their goals? 

A Monte Carlo statistical analysis-based financial planning software allows modeling a range of possible outcomes based on different market conditions and economic scenarios. Rather than relying on a single forecast, it generates thousands of potential scenarios to provide a more comprehensive conclusion. Working with an advisor, families can then adjust their savings, spending, or investment portfolio to pursue their objectives.

We’re Here to Help

Keeping a personal balance sheet and partnering with an investment advisor can help families obtain a more comprehensive view of their financial situation and allow them to take appropriate steps that align with their financial goals.

If you’re looking for a financial partner that is committed to putting your interests first, the Everest Management Corp team is here for you. We prioritize responsiveness and deep client relationships as we seek to understand each family’s needs and identify unique ways to grow their wealth. Schedule an introductory, no-obligation meeting by contacting us at 408-502-6015 or emc@everest-mgmt.com.

About Ranga

Ranga Srinivasan is co-founder and principal at Everest Management Corp, an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. After graduating from the University of Cincinnati in the field of engineering, Ranga, witnessed the dot-com collapse in the early 2000s and sought to manage his own personal finances. He realized that many of the options available were unsatisfactory for a myriad of reasons. Knowing it could be done better, Everest was founded in 2007 to provide comprehensive wealth management. Ranga and the Everest team are dedicated to caring for the financial needs of the families they serve. With an emphasis on building trust and holding to the fiduciary standard of putting clients first, Ranga strives to offer financial solutions that inspire confidence. 

In his free time, Ranga is passionate about staying active; you can often find him swimming, golfing, biking, and playing tennis. He also has a great love for charity and philanthropy work. To learn more about Ranga, connect with him on LinkedIn.

About Ramprasad

Ramprasad Satagopan is co-founder and principal at Everest Management Corp, an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. As a self-made, highly educated first-generation immigrant, Ramprasad became passionate about investing after witnessing the dot-com collapse in the early 2000s. He created Everest to help his peer engineering community to build household wealth in a systematic way. Everest has grown over the years while staying true to its fiduciary commitment. Ramprasad and the Everest team take pride in being a firm that brings a reputable, honest, and caring approach to all its clients.

Ramprasad graduated from both the University of Cincinnati and the University of Phoenix with a master’s degree in science and business administration, respectively. When he’s not helping families build a strong financial future, Ramprasad can be found enjoying traveling and reading. To learn more about Ramprasad, connect with him on LinkedIn.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These views may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Everest Management Corp strategies are disclosed in the publicly available Form ADV Part 2A. 

Everest Management Corp is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Everest Management Corp and its representatives are properly licensed or exempt from licensure.