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Balance Sheet Basics: What Is It, Why Need It?


Balance sheet basics to help you assess your current assets, the building blocks for your economic freedom.

Doug Fabian: Where are you today on your journey to economic freedom? Today you’re going to find out, once you build out your balance sheet. What’s a balance sheet and why do I need it? Stay tuned.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.



Doug: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones.

Today we want to help you identify your next step on that journey. This is episode five, “Building your Assets.”

Economic freedom is not complicated. It is simple and straightforward, as you have experienced so far on our journey together. This episode is another milestone show. You will hear things that you already know, but the exercise we will be doing together today is one of those steps that few people take. We are going to talk about how to build your assets. We know from the definition of economic freedom that it is achieved when we have built enough critical mass in our assets not to have to worry about money. Building up your assets on your balance sheet, or your net worth statement, is how we win the game.


What is a balance sheet?

You are going to hear this term frequently today, balance sheet. It is a business term that is the current value summary of your assets less your liabilities. The sum is your net worth. Knowing what is on your balance sheet is critical, it is your starting place, much like your health chart if you were in the hospital or a doctor’s office. It summarizes where you are today. Now, most people never even create it. It’s too painful because there on your balance sheet are all of your victories and all of your mistakes. Those of you who have gotten this far know that if you want to achieve your goals, you must get your financial house in order. This is your house. This one-page document of your assets and liabilities that is your total net worth, is your house. Once you have it constructed it is very easy to know how to improve it. But without a balance sheet, it’s difficult to know where you are or how to begin to improve it.

We have created a special report in the Resources section at, it is titled “Balance Sheet Basics.” We have instructions, definitions, and forms to help you create your balance sheet. It should only take 30 minutes once you have information in front of you. Running down all the data can take a little time, but it is not difficult. You only update your balance sheet once a year. This is a list of all of your assets’ current values and all of your liabilities’ current outstanding balances as of a specific date. It is constructed by listing your most liquid assets at the top of the page and your liabilities at the bottom. There is a value on each line. There’s a reason to construct your balance sheet in a proper way — when you do so, it becomes easy to figure out what you need to do to improve.


The board categories on your balance sheet

Let’s walk through the broad categories on your balance sheet to get a better understanding of how this works. We start at the top with the most liquid, taxable assets. Cash, checking and saving account balances. These are assets that you could spend tomorrow, or would be there in an emergency if you needed them. Mutual fund investments would be next, followed by your brokerage accounts. Balance sheets don’t contain any detail. There are just broad categories. It does not matter what bank or brokerage company you use, nor do you list individual stocks or investments on this document. We have cash and equivalents, mutual funds held directly at a fund company, brokerage accounts. That’s it.


The retirement accounts

Next we move on to your retirement accounts. These will be listed as follows. Your contributory accounts like your 401(k) or 403(b). Next, your IRAs — Roth IRAs, if you have an annuity or another retirement asset. That’s it. There is no place on the balance sheet for monthly contributions, nor does it matter what your retirement accounts are invested in. Just a summary, a snapshot in time, values as of a specific date.


Assets that are less liquid

Let’s move on to some other assets that are less liquid than bank and investment accounts. Cash value life insurance. Loans that you may have made to other people. Securities that are not readily marketable. Now this means you may be in a private placement or an angel investment that can’t be sold until some future date. Use your cost basis as the current value of those securities. Next would be any business interest that you have. Maybe you own a business in its entirety, or you’re partially owner of a business, you need to place some value on your business interest, and in most cases this is a guess.


Real estate and balance sheets

Now we are down to your real estate. Some people own no property, some people own one property, some people own multiple properties. We’ll begin with your primary residence, vacation home, rental property, and commercial property. Now we want to be honest with ourselves on the fair market value of your real estate. There are many tools and sources online to help you value your property, but be conservative with your investments. Remember that there are transaction costs in real estate of 5 to 6% if you were to sell. Finally, value your personal property. This includes household items, jewelry, art, collectables, automobiles, boats, RVs or other toys. Again, don’t expect a big number here on your personal items because if your stuff had to be sold, it would be sold most likely for less than you paid for it.

Now great, we have a list of all of our assets. We coach people that once you have your statements and info pulled together, the creation of your balance sheet should take 30 minutes, but it is a very important 30 minutes, plus the prep time.



Now let’s talk liabilities. Liabilities are offsets to assets. Net worth is calculated by the formula, assets minus liabilities equals net worth. We want our net worth rising year over year. Ideally, we want our liabilities falling and our assets increasing. Before we get into specifics about organizing your liabilities let’s define good debt and bad debt. Obviously, we don’t want to carry any bad debt, and we want to properly manage our good debt.


Debt and balance sheets


Good debt

Good debt is defined as any debt that has a taxed advantage and is supporting an asset or activity that can increase in value. Here are some examples. Mortgage debt. The interest on mortgage debt is tax deductible in most cases, and the purpose of the debt is to support real estate ownership and that real estate can appreciate. Business debt. Interest is tax deductible, and the business can provide income for you and asset appreciation. And then lastly, student loan debt. Some tax deductibility, and career enhancement is the outcome.


Good debt turning into bad debt

Now, good debt can become bad debt. Here are some examples of that outcome. Mortgage debt at a very high interest rate or a home purchase with little or no money down can create bad debt circumstances. The overleveraging of your balance sheet or loan terms that are outside of market rates can create a situation where good debt goes bad. Another example is a business loan that results in a failed business. Now you have a liability and no asset or income to support the debt. Lastly, a student loan that does not produce a degree or opportunity would be another situation where good debt goes bad.


Bad debt and balance sheets

Let’s talk about bad debt. Bad debt is obvious. Credit cards, personal loans, auto loans, these are examples of bad debt. You cannot deduct the interest nor is there an appreciating asset or income stream that the debt is supporting. Most bad debt is excess spending. Another way to say it, spending above your means. If you’re paying your credit cards off monthly, you would not even list them on your balance sheet. Organize your debt with your good debt first: mortgages, business loans or student loans. The only number you need is the current balance. You don’t need the interest rate that you’re paying nor the payment. Then list your bad debt last in broad categories: auto, personal, or credit card. That’s it.


Balance sheet basics

Now, we have a special report at our website entitled “Balance Sheet Basics.” This report gives you instructions in a form, more tools to use. Once you have assembled this information and created your balance sheet, we are ready to attack the opportunities to improve it. How can we improve on your balance sheet? There are four actions you can take to improve your net worth. Save more, spend less, earn more money on your money, or make more money. Saving more and spending less go hand in hand. You can’t do one without the other. We have another report at, “Seven Ways to Give Yourself a Raise,” to challenge your thinking on your bills and expenses. Saving more can happen by paying yourself first. Having your savings come out of your paycheck on payday. This is how your retirement account gets funded, payroll deduction. A question only you can answer, how much am I saving every month?

Now, earning more money on your money is a way to improve your balance sheet as well. How is your investment strategy doing? Is there idle cash that is sitting around in bank accounts not earning anything? Perhaps your investment strategy needs an upgrade. Finally, there is making more money. How could you earn more money next year? Could you get a raise or a promotion? Could you get a new job that pays a higher wage? Could you start a business, a side business? Get a second job? There are many ways to make more money. Let’s not leave this off the table as an option to improving your balance sheet.

Now that you have your balance sheet pulled together it will be obvious what needs to be done. Here are some ideas. Pay off the bad debt. Save three months of expenses in an emergency fund in the bank. Save more money in your retirement accounts. Start a college savings account if you have a child. Sell assets on your balance sheet that are not contributing to your economic freedom or quality of life. Your balance sheet is your financial house, it is your life’s work life to date. Improving it becomes easy once you have your assets and liabilities listed out.


Action Steps

Now here are your action steps for today. Download our special reports from the Resources section of There are two reports that we talked about today, “Balance Sheet Basics” and “The Seven Ways to Give Yourself a Raise.” The most important step, complete your balance sheet. This will be time well spent. This is Doug Fabian. Thanks for listening.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.

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