Reckoning With Your Balance Sheet

Since I have a pathetic emotional attachment to my car, I'm not allowed to list it as an asset, even though it's paid off. A paid off car is a good thing, but since I would never sell it, I don't get to list it on my balance sheet.

December 16, 2007: check out Jon’s podcast update to this chapter, where he explains his approach to finance in the context of “freeing yourself from corporate America.”

A balance sheet can be a terrible thing to behold. So we save ourselves the trouble by either not creating one or doing it inaccurately. Unfortunately, listing our home as an asset and patting ourselves on the back is not going to get it done.

A properly constructed balance sheet tallies up the resources we have to throw at our problems. This could be the difference between leaving a crummy job tomorrow versus having to dig in with a long term exit plan. You can’t walk away if you don’t know what you’re working with.

The easiest way to generate a balance sheet is through an accounting program, but that won’t get you the kind of balance sheet we’re after. The best way to make ours is with a spreadsheet like Excel. It doesn’t take much know-how to put together a simple two-column spreadsheet with liabilities on one side and assets on the other. A piece of paper might serve you better than fancy software. A full-featured accounting program is going to classify some things as assets that are not. And it won’t take into account other personal goods that are in fact assets.

Financial advisors promise that your home and retirement account are assets. In this book, they may not be. When you do your “Free from Corporate America” balance sheet, you only list assets that can be converted into cash in a short-term timeframe (three to six months max). Retirement accounts can only be included if you are willing to liquidate them.

Most people are not, and for good reason (If you are thinking of using your retirement account to launch a business, always look into borrowing against it first). For our balance sheet, you can only include your retirement account if you really are willing to liquidate it. Of course, you must subtract the penalties and early withdrawal fees and list only the remainder of your IRA as an asset.

When it comes to getting out of corporate America, cash is our key asset. The extra cash can be applied in several ways: we could step back from our “careers” and pursue a more promising field; we could launch a new side venture, or we could shift to part-time work and pursue our own projects aggressively. You can’t make those choices without an accurate balance sheet.

We approach the balance sheet differently because of our premise that 9-to-5 living is not going to get us there. The new plan is to stop putting all our cash into inaccessible IRAs and instead to use it to fund the creation of our own income-generating assets. These assets will give us a “home run potential” we didn’t have before, and they will ultimately increase our job satisfaction as we get closer to working on our own terms.

With that in mind, what do you do with your home? If you own your home, you may have been advised to list the entire worth of the home as an asset on your balance sheet and then list what you haven’t paid as a liability. Since we are only interested in cash we can put to work in the short-term, we don’t do that. On this balance sheet, there are two ways you can account for the value of your home: if you have enough equity that you could refinance your primary mortgage and take money out, then list the amount of money you could pull out as an asset. (strictly speaking, refinance money is a loan, not an asset, but since it’s protected by the underlying value of the house, we are bending the rules).

Alternately, if you could sell your home and make a profit, and *if* you have no problem selling your home and cashing out, then you can list your home as an asset. If you go this route, you need to determine the price of the new home you would buy when you sold your old one, and then determine the cost of the down payment on the new home. Take the profit you would make from the sale of your old home, deduct the cost of the new down payment, and you have the true amount of your home as an asset for our purposes. We are looking for the cash you have to work with, and nothing else.

This is a more painful process than a typical balance sheet, and you’re certainly encouraged to do a more conventional balance sheet alongside this one. Conventional balance sheets work fine for those who are content to click their heels together and hope that the corporate economy holds up and that retirement will offer a chance to live a little. This book holds that we can’t afford to wait, so we need a different kind of balance sheet. I’m not saying you shouldn’t put any more money into your home or your IRA. But you are going to need some capital outside of those investments (unless you are able to borrow against them in a way that is financially appealing).

Using our system, how do you treat your car? Same as your house. If your car is paid off, take the resale value of your car, subtract the cost of the next car you would buy, and list the difference as your automobile asset. You may wonder why we aren’t allowed to simply subtract the new car’s down payment as we did with the home. The answer: financing a car is not considered the best strategy. Financing a home gives you access to home equity loans and competitive interest rates (not to mention tax deductions). Since car loans do not provide these benefits, the total cost of the new car, not just the down payment, must be subtracted from the value of our current car.

I have a car problem. My car is probably worth $14,000. I could buy a used car for less and pocket the difference. But since I have a pathetic emotional attachment to my car, I’m not allowed to list it as an asset, even though it’s paid off. A paid off car is a good thing, but since I would never sell it, I don’t get to list it on my balance sheet. The benefit of a paid off car will become apparent in our next chapter, when we construct our monthly cash flow statement. But my absurd love for my car is a great illustration of how “assets” can get us into trouble, and how we have to be careful about classifying them as assets if we have no intention of ever selling them.

So what else constitutes an asset? Besides our checking and savings accounts, not much. Some books, including the excellent Your Money or Your Life, tell you to count material possessions as assets if they can be liquidated for cash. I don’t agree – unless you are truly ready to part with them. Extreme example: a wedding ring. I don’t consider it an asset because it would only be sold in dire times. By the time you’re selling your wedding ring, you have more to worry about than corporate America. Divorce changes the emotional ties – then it might be considered an asset at cash value.

The problem with listing our possessions as assets is that in reality, we’re not likely to part with them. My DVD and CD collections are probably worth $1000 in cash (and weren’t a great investment on my part for that matter), but there’s only a handful I would sell – bad gifts like The Mummy Returns. Either way, The Mummy Returns isn’t going to save my balance sheet. Since I wouldn’t freely sell my DVDs, I can hardly call them an asset. In contrast, I have a friend who is a freelance writer. She has technical bling like iPods lying around that she was given for product reviews. I consider that stuff an asset because she has no attachment to them. For this book, if you’re not willing to put it up on eBay, you can’t list it as an asset.

The end result of our asset column might look something like this:

Checking: $10

Savings: $25

House: $50

Car: $20

Household Items (CDs, extra TV, etc): $10

Total Assets: $115

(I have used small numbers so that our examples resemble my own assets).

Then we move on to our liabilities column. For most of us, the liabilities column is not a pretty picture. Typically, credit card debt alone is enough to earn us at least 5K in liabilities. If we owe money to friends, family, or our alma matter, that goes on the liabilities column too. The last one burns, since we can’t list our degrees as an asset. The good news about our system is that if we owe money on a house, boat, or car, we don’t have to list it as a liability here, as long as the resale value of the “asset” is greater than the amount we owe.

Unless we own some bad-luck floodlands, we should be able to avoid listing these financed items as liabilities. The exception might be over-extended houses with several mortgages on them. Businesses make distinctions between short-term and long-term liabilities to get a clearer picture of when the hammer comes down for particular debts. You can do this if you want, but it’s not essential to our purposes here.

A liabilities list might look like this:

Credit Card A: $50

Credit Card B: $30

Family Loan: $20

Student Loan: $20

Total Liabilities: $120

(if you only have $120 in liabilities, you are looking better than most of your neighbors, even the ones who drive nicer cars than you).

Once we’ve added up our assets and liabilities, we can subtract one from the other to determine our “net worth.” In this case, our net worth is a negative $5. It is not unusual to have a negative net worth using this rigid method, which excludes retirement accounts and homes that could balance the equation in our favor. But that kind of “balance” is deceptive, as the cash we are listing for our home and retirement account is not something we can turn to in order to solve the work predicaments that are our focus here.

My own balance sheet isn’t going to win any prizes. My liabilities, which are too demoralizing to include here, involve a modest (but annoying) amount of consumer debt, as well as a business credit line with a balance outstanding. This raises the question: if my balance sheet is so unimpressive, why should this book be taken seriously? If it will help my credibility, my cash flow situation is pretty solid, and that’s a key piece of financial health we’ll investigate in the next chapter.

I have also been able to self-finance the development of several assets. I have two books out; this one is my third. I can’t list them as assets, because at this time I can’t (and wouldn’t) sell them, but one of the books is generating some decent income, so hopefully good news is to come. No, my balance sheet isn’t impressive, but one of the reasons it’s so low is because I’ve spent good money and time creating assets that may one day dramatically strengthen my finances – while giving me a great deal of freedom in terms of when and how much to work. By my own rules, I’m not allowed to list my books as assets, but down the road, I hope that they will add considerably to my financial standing. You may experience a similar “dip” in your balance sheet as you get your new ventures off the ground, but that is the kind of risk you have to take to keep the bigger dreams alive and give your life a serious upside.

My books give me a focus for my future, and you can’t put a price on a plan that shows a way forward. You may have heard of that rule: pay yourself first. (This rule refers to the practice of putting money in retirement accounts before you pay any other bills). My variation on that rule is: fund yourself first. No matter how tight the cash is, make sure those projects are moving ahead somehow. If you live strategically and not just paycheck-to-paycheck, chances are that your balance sheet will eventually reflect the maturity of your approach.

Want to buy Free From Corporate America or see reviews of the final published version from readers like yourself? The printed book is now available on with product reviews.

You can also get a discounted version of the final book in eBook (PDF) format, or you can pick up a copy on the Kindle. The published version of the book is significantly enhanced from the web version available on this site.

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