Personal Financial Planning (FIN 502) – Chapter 4 Notes
Balance sheet or Statement of net worth
• a photograph of the family’s financial standing at a point in time
• summarizes major assets and liabilities, with balancing figure being the net worth
o important for two reasons
provides a benchmark or measure in meeting the family’s goals
listing and evaluation of assets show what you have to manage
Defining the Family
• any group of people who share their wealth, revenues, and expenses
o some members might have resources they do not share but primary resources
needed to live are held in common
married couple with children
common law relationships
What Assets Do We Include?
• Grouped into three categories
o Financial assets: provide income or are part of what you will consume in
Most important in financial planning purposes
• Cash on hand, deposits in financial institutions, retirement savings
plans, shares and bonds, mutual funds etc.
o Personal use assets: are the ones you use in everyday life • Home, car, furniture, clothing, household supplies, maintenance
equipment, TVs, sporting equipment etc.
o Luxury assets: are also for personal use, but are very marginal to the family’s
• Jewellery, vacation property, valuable collections
• The amount of detail you include depends on the use of the statements.
What Liabilities Do We Include?
• Grouped into two categories
o Current liabilities: are due within one month
Credit card, telephone, electricity, natural gas, current portion of long-term
loans, income taxes, insurance premiums etc.
o Long-term liabilities: are due later than one month, and are often payable
monthly for many years
Consumer loans, mortgage on home, other mortgage, investment loans,
student loans, pledge, amount owed on lease etc.
Valuation of Asset & Liability
• Financial asset
o Value them at market, always
o Transaction costs to liquidate will range from 0.1% to 5%
• Person use asset
o if family decides to sell some personal assets to generate money for retirement
funds then asset should be valued at market less cost of disposition
• We follow fallow these general rules but there are always exceptions: 1. Value household and car at market. If planning to sell these assets and
using proceeds towards something other than another house or vehicle then use
market value less all costs associated with sale.
2. Value all other personal use assets at replacement cost. Value any asset
you are planning to sell and not replace at market less all costs associated with
• Luxury assets
o Value them same as a personal use asset other than a house and car
• In financial terms, the earning power that a person possesses