[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And I wanna tell you about a time when I had just finished one of my very first accounting classes. I had already quit my job as a teacher and I was on my way to getting my CPA. And I’m sitting there in class and the professor’s up in front and she’s telling me all about financial statements, which I know to many people sounds like a snoozer. But she’s presenting these financial statements as communication devices; that we, as accountants, are first and foremost communicators. We tell the story behind the numbers and so, the presentation of the financial statements should paint a clear picture to the users of those financial statements. And so, I’m learning about balance sheets, which of course tells you all about companies’ assets and liabilities, and basically it’s like a health statement for companies. And so, I’m like so excited and I run home and I sit down at my kitchen table. I pull up my laptop. I was like, I am gonna make my own personal balance sheet. Like I’m super excited by this. This is like the way the rubber meets the road. This is why I wanted to become an accountant in the first place — was I wanted to be able to really dive into things and see them from the inside out. And so, I put together my personal balance sheet and I calculated my net worth for the first time in my entire life and it’s negative. Oh, that was okay ’cause I expected it’d be negative. I just didn’t expect it to be that negative. And I’m just crushed. I’m feeling so overwhelmed. Like how could I ever crawl out of this hole I’ve dug for myself?

[00:02:03] And ladies and gentlemen, I tell that story because a lot of times when we start budgeting, there’s a communication that needs to go on and you need to be able to look at where you are in this journey. And personal financial statements are a great way to do that. We talk a lot about budgeting on the show and that is the primary way in which we get these financial statements out. But the budget is not the complete picture because one thing that is almost universal is that throughout the budgeting process, eventually, the question comes up — typically, after some successes had and some breakthroughs have been secured, the question comes up: well, how do I get rich? And what that person is really asking me is, how do I start investing? How do I get to the next level? What’s the next step? And it is I think a universal human truth that we always look at like, alright, we just completed step one, so let’s go to step five. Like no, no, no. There’s steps in between and trying to do the jump is like buying a lottery ticket. It might work but probably won’t. So, the next step that we go through is a balance sheet. And what a balance sheet is is it’s a snapshot at a particular moment in time. And these snapshots, like when you put together a balance sheet, you can do them at any time. They’re not really material to how you manage your day-to-day and month-to-month budgets. They’re just a way for you to be able to take the temperature of where you’re at in this process. And like for myself personally, I am in charge of paying bills in my partnership with my wife. And so, I actually create a balance sheet. It’s actually like one of the ways that I track like what bills I’ve paid, so like when I open up credit card statements and I clear that credit card for the month, you know, I’m putting in “zero” in that credit card statement of the balance sheet. I’ll get into what a balance sheet is and how to create it. The important thing here though is that you’re looking at it and at some point throughout a year, you’re sitting down and actually calculating out your net worth because that’s how you know whether or not you’re making progress on your path to financial sovereignty. I do mine monthly. Some people do them quarterly. I do have one couple that’s in the coaching practice with me where they do it annually like this is what they do in the time between Christmas and New Year’s is they actually sit down and they, for lack of a better term, close their books as a couple and kind of do a year-end review about how things went and what things they wanna change and they look at their insurance and like that’s a whole thing that the three of us have developed for them that works really well for that couple. But a balance sheet is a snapshot in time but it’s a very useful one. A balance sheet is an opportunity to really look at what the health of your assets are and what has changed, what is the status of your liabilities.

[00:04:56] Okay, so what is a balance sheet? Very simply, a balance sheet is literally just a listing of your assets on one side, liabilities on the other, and your net worth is really just your assets minus your liabilities. Sounds super simple and not as simple as you’d like to think. But on a personal level, it’s actually more straightforward than it is on the corporate level, and that’s where most of my experience with this is is doing financial statements for corporations. But on the personal level, let’s just actually go through each one of these categories and talk about what is and is not an asset or liability and then what to do with it once you have this information.

[00:05:32] Okay. So, to create a balance sheet, you’re gonna start off by listing your assets and your assets are going to be anything that you’re holding with the expectation of an economic benefit in the future. So, that’s a lot of words and that’s a very technical definition but essentially, it’s something that you could spend to get something else, okay? So, your cash accounts are considered your assets. So, that’s your checking accounts, your savings account, your money market funds. I do get people who come in all the time and like, what about my CDs? Well, okay. For starters, if you’re investing in CDs, don’t. And if you are sitting there going well, are you talking about like music? Like, okay. Well, that’s a totally different conversation we have to. CDs are certificates of deposit with banks and they’re not great,. But yes, those would be considered a cash account. Money market accounts, while not technically a savings account, are also considered cash accounts. Cash accounts are basically anything where you can get your hands on cash out of that account within the next 48 hours. So, that’s a pretty simple definition. Some people will quibble on that because savings account might take a moment to get into a checking account, so you can withdraw it but basically, it’s liquid assets — things that you could get your hands on very quickly.

[00:06:45] The next type of asset would be like retirement accounts, so this is your 401(k), your 403(b), a pension fund if you have one — specifically cash balance pension fund. Yes, they still exist. No, they’re not great — and then, of course, your IRAs or individual retirement accounts. Those are considered retirement accounts. Another account that I would throw in here and at some point down in the future, I will be discussing this particular account ’cause it’s one of my favorite savings vehicles is an HSA or health savings account. It is a tax-deferred account and so, I would count that as retirement funds because it can function that way down the road. So, like retirement funds — 401(k)s, 403(b)s, IRAs, and HSAs. Any other tax-deferred account would qualify in here, too.

[00:07:31] The next one down would be, so after cash counts or retirement accounts, would be your taxable accounts. So, if you’re investing and you’re like, well, I use Acorns. Okay, what’s Acorns? Well, it’s an app that will round up your purchases and then, you know, invest those difference into the stock market. Okay. That would be a taxable account unless you specifically set it up otherwise. Same thing with like, if you, well, I have an investment account at M1 Financial. Okay, cool. Great. Great company like them a lot. Is it taxable? If it’s taxable, this counts here. You shouldn’t be doing a lot of withdrawals out of retirement accounts. But taxable accounts, people go in and out of all the time. So, cash accounts, retirement accounts, taxable accounts.

[00:08:13] Then we get to life insurance policies. Okay. So, here’s a sidebar on life insurance policies. Life insurance policies that come with a savings vehicle are almost always under all circumstances — and note the almost always — not a good idea. Only after you’ve maxed out cash and you’ve maxed out retirement and you’ve started to get into ridiculous levels in the taxable accounts do something like a whole life insurance or universal life insurance policy actually start to make sense. There are a ton of people who will reach out to me and say, Hey, I wanna come on the podcast and tell you about being your own bank. And it’s like, okay. What are you selling me? Oh, I’m selling whole life insurance. Okay. That’s where you run not walk away from that suggestion. Why? Because the premium’s on a whole life insurance policy and this is basically how it works is that you would say, okay, I’m gonna pay a higher premium versus a term, which is only for like a set period of time. So, like for myself personally, I have a 20-year term life insurance policy. So, if I die in the next 20 years, my children are getting the balance of that policy. But in a whole life insurance, it ensures you for your whole life and then they save and it will have a cash balance that you have in the future and blah, blah, blah, blah, blah. It’s this great thing for the people who sell them but basically nobody else. Because the difference in funds between which you’d pay for whole life insurance policy and what you pay for a term life insurance policy, that difference, if you took that difference and put it in an IRA, you would end up ahead of the curve in almost all circumstances. Like there is a reason why whole life insurance companies seem to be like the Teflon Dons of the investment industry because shit don’t stick to them. Like they seem to be just immune to a lot of economic conditions. Why? ‘Cause people are paying into these policies that make no sense for the person for whom the policy is written but great sense if you’re the person doing the actual writing of the policy. But if you are the unfortunate recipient of making bad decisions in your early years and you have a whole life insurance policy at this point, that goes in your assets as well but only the cash balance. And if as long as you’re going into your policy to go find the cash balance, take a look at what you’ve totally paid into it versus what the cash balance actually is and then give yourself permission to be upset about that.

[00:10:32] Okay, so cash retirement, taxable life insurance. Now, the next one is hard currency. This is one where I go back and forth on a lot of so whether or not to include it, but hard currency in this particular case is gold and silver bullion. And if you have paper silver, so then I’m not going to go too deep into this because you either know or you don’t. But if you have paper silver, that should be an investment account, which wouldn’t be here. I’m talking about the physical assets held in your possession. There are some people who invest a lot into hard currency and there are some cultures and religions where this is a big deal. And so, being respectful of those people and understanding that that is maybe not my cup of tea but definitely certain people’s cup of tea, hard currency at the current spot value would be considered the asset itself. And so, when you buy a piece of metal, whether it’s gold or silver, platinum or palladium, there is going to be a spot price. So, you typically buy it in an ounce, so you just take the price per ounce times number of ounces you have. Voila. That’s the amount you put on your balance sheet.

[00:11:35] Okay. So, the next two are where I’m gonna be controversial, depending on how much you care. So, the next one down that I’m gonna put down in assets is your home or your real estate holdings. Now, here is where people will get into trouble. What I will tell you in my experience as a financial coach is that you should only put on your balance sheet the most recently appraised value of your home. So, if the last time you got an appraisal was when you bought it, that is the value you put on the balance sheet as the value of the asset. And this is where people will buck and scream and whine and complain because they’ll say, but Dylan, I live in Denver, Colorado when I bought the house for $400,000 but Zillow tells me it’s worth $700,000. Well, maybe it is but you don’t actually know that until you actually go to market. I’ll be the first one to tell you that the estimates that you can find online don’t hold a whole lot of water. And where people get into trouble with this is that they get desperate to see their net worth increase, so they take an overly optimistic view of what their home might be worth. And one of the things to understand about your home — and I have a very good friends who are real estate agents who I imagine will like not like me for saying this — but your primary home should never be viewed as an investment. It should be viewed as a home. You shouldn’t buy it because you’re trying to find a good area and trying to make the right investment. Chances are good your boomer parents told you that. That’s a bunch of bullshit. Buy the house that’s right for you and your family and let the investment side of it take care of itself. Homes should be homes. They should not be investments. And if you start going into this idea of, well, the house is worth more, it might be worth more to you because it’s your home. People find themselves in trouble by being overly optimistic about what they think their house is worth, which is why I say use the last appraised value of the home ’cause that’s the last sure mark in time you have as to what it might be worth. Moreover, if you’re stopping and you’re thinking ahead to the liability section as you pay down your mortgage, you will be able to reflect the equity in the home as you go along. So, maybe a controversial opinion but it is a methodology that I’ve seen be very successful over time.

[00:13:55] Okay. And the last asset that people will always put on their balance sheet: cryptocurrency. Okay. So, let’s have a conversation about cryptocurrency. Is cryptocurrency an asset? Well, okay. By the definition of an asset of something of economic value held with the expectation of an economic benefit in the future, yes, cryptocurrency can in fact be an asset. The one thing I will say here though is that if you’re looking at your balance sheet, you should do percentages of your assets. That is to say how much of your total asset base is held into cash accounts, retirement accounts, taxable accounts, life insurance, hard currency, real estate, and of course crypto. Cryptocurrency is a speculative asset. There isn’t an economic underlying argument with cryptocurrency as it stands currently. It’s the same thing with the hard currency. There isn’t anything regarding economic activity over gold and silver held in your hand. It’s not actually doing anything. It’s a commodity. You can do stuff with it but it by itself, it’s not actually representing the actual economic stuff at this moment because it’s not neither one of the gold, silver, or cryptocurrency can function as a medium of exchange currently and that might change in the future. And I’ve said repeatedly, if it does, it’s a trillion-dollar prize for whoever actually be makes crypto into a medium of exchange will win a trillion-dollar prize. That I think is undisputed. But the point I’m making here is that when you put crypto on your balance sheet and your assets, if you’re holding crypto, you need to consider how much risk in your assets you have because if it’s over 10%, it’s a really risky asset base. And for my money, one of the things that with dealing with your net worth and investing and obtaining financial sovereignty, you really need to be honest about how much risk you’re taking on and we know that humans are bad for this. If you tuned in last Friday, I talked a lot about the collapse of Silicon Valley Bank and Silvergate Financial. And one of the points I made in that podcast was that the people at the bank who were experts in risk mitigation were terrible at risk mitigation and that’s what helped cause those collapses. So, I’m giving you some what I think to be easy insight here in that if you are overinvested in crypto, just take some time to assess how risky that portfolio is to have that level of speculation in your portfolio. But yes, crypto goes in the asset category.

[00:16:38] Okay. Let’s move on to talk about things that are not assets that people frequently wanna put on the balance sheet. So, number one: you’ll notice that cars are not listed on the balance sheet. There are very few times in which a car is actually considered an asset. In the case of like owning classic cars and you have a like when we’re talking like real serious classic cars or, you know, this would also apply to artwork or like that bottle of wine that you think is worth a hundred thousand dollars in your basement. All of those things are speculative assets and most of them are depreciative assets. So, cars specifically are depreciative assets, which means that they, yes, they do have a monetary value. Yes, they provide economic benefit. And on a corporate balance sheet, we would include them against their depreciation because they are something we are using to make money. But us as individuals on a personal level, don’t get into this. This is far too complicated. Cars are not an asset. They are a liability. They’re an expense. That’s what they are. Same thing with artwork. Same thing with hyperold bottles of wine or whiskey or whatever. On a personal level, those are not considered assets. The other thing that’s not considered assets that people will try to quantify is they’ll go around their house and they’ll like try to con up all your things and think about, well, if I had a big yard sale, how much could I get? Like don’t do that. Those are called chattel and chattel assets are not things that end up at a balance sheet. So, don’t go out in your garage and be like, well, this drill, I think that’s worth $20. Like no, no. Like again, simplicity. I’ve already given you a lot. And you can go to FiscallySavage.com/Tools to download an actual balance sheet and start this process. I’m gonna lay it out very succinctly there, too. But you wanna be as simple as possible. So, the bare minimum you should have are your cash, retirement, taxable, life insurance, hard currency, appraised value of your home, and crypto in the assets category. There might be a couple extra things but this will get you started.

[00:18:40] Now, let’s go and talk about liabilities. Liabilities, on the other hand, are things that you owe to somebody else. And so, the loan you got in exchange for the mortgage on your house, that is a liability. So, you’re gonna take the balance of that, not your payment that goes on your in your budget, right? Because that’s the expense. We’re talking about the balance in which that you owe on your mortgage. And other liabilities are your credit cards, student loans, auto loans, personal loans, anything you have in collections or judgments, or basically anything else you owe to somebody else. So, even if it doesn’t show up on a credit report, if you owe that money, that is a liability. Let me give you a great example. As a general rule, I don’t carry auto loans. I really haven’t for a long time with the exemption in 2019, the transmission in my Toyota Camry froze up and it was right in the middle of busy season and I needed a car. I did not have the time — because it was busy season because we were so overloaded with work during that time of the year — I didn’t have the time to go like go find a used car. So, I was like, alright. I’m just gonna buy the cheapest car I can find and I’m gonna buy it new. So I bought a very cheap Nissan. Well, I was paying the auto loan price, even though I didn’t have one but to myself as an expense and I was about halfway there. Well, I bridged the gap with a loan from my grandmother. Well, that goes on my balance sheet, even though it’s not in a credit report, even though it’s not recorded in the courthouse, I’m going to pay my grandma back. My grandmother is getting her money back. Like that’s just I will sooner default on my credit cards than I’m gonna default on my grandmother. And so, that goes on the balance sheet. Now, I paid her off as fast as I possibly could and I’m very grateful that she provided the safety net and she was a liability or at least the money she lent me was a liability for that period of time. Things that are not liabilities: bills. The bills you pay are not liabilities, so your mortgage payment, credit card payments, student loan payments — you get the idea. Anything you’re putting out on a monthly basis is not a liability. It’s an expense. And while we’re talking about expenses, future expenses are not really in this category either.

[00:20:49] So, now what you should have on your balance sheet is a snapshot in time of all of your assets listed out and all of your liabilities listed out. And for most people listening, this might be the first time you’ve ever actually looked at this. This might be the first time in your entire life that you actually knew how much you had in assets and how much you had in liabilities. That will tell you a lot of information about where you’re at right now and where you need to put your attention. And once you have those two columns — all of your assets listed out, all of your liabilities listed out — assets minus liabilities equals your net worth. And so, if you’re wondering what your wealth is today, that’s how you calculate it. You make a balance sheet. And again, you can go to FiscallySavage.com/Tools and download a balance sheet and actually put this together and look at what your net worth is, how much wealth have you built, or in the case in which I did this for the first time, how far behind you are.

[00:21:48] And I know exactly what might come up during the balance sheet because when I was staring at a negative five figures the first time I put together a balance sheet, I was panicked. I was worried. I was wondering how I could possibly get myself out of this hole. And then it dawns on me that I now on this spreadsheet have a way to see what I owe and a method to track it over time. I have a number, a very simple number, my net worth that I can now chase. I can increase my assets. I can reduce my liabilities. I can choose one and then the other. And so, what I started to do, ladies and gentlemen, is I started using my budget to start reduce my liabilities. And when I got out of school and I got my CPA and I’m working at the CPA firm, I started saving into my retirement accounts — my 401(k). Started putting some money away in my HSA. And so, now my assets are coming up at the same time my liabilities are going down. And I’ll never forget. I’ll never forget. I sat down to do the bills. I created my monthly balance sheet. My net worth was 6 cents positive and I jumped out of my seat and I ran to my wife and I gave her this big hug and I picked her up and I said, Honey, we did it. We have a positive net worth. We’re rich for the first time in our lives. And she looked at me and went, well, how much is it? And I said 6 cents. And then she laughed and I laughed and I felt so much better about where we were at that time. Ladies and gentlemen, I want that for you, too.

[00:23:36] And before the outro hits, I do want to let you know about something that’s so exciting that I am absolutely just so looking forward to. Fiscally Savage and the Venus and Mars Podcast are doing a collaboration on April 8th, 2023. It’s gonna be on April 8th — that’s Saturday — from 11 to 12:30 Mountain Time, and we would love it if you would join us. You can go to FiscallySavage.com/Workshop. Get signed up. We’ll see you on the inside. It’s gonna be men, women, and money. We’re gonna be talking about how our money wounds impact our relationship as men and women. It’s gonna be a great time, a lot of insights, and I’m hoping that we’re gonna have a lot of stories and laughter along the way. So, again, FiscallySavage.com/Workshop. Anya and I would love to see you there, so please get signed up and I will see you on the 8th. Take care everyone.

[00:24:37] Outro: Thanks for listening. If you like what we do here, please hit that subscribe button. Leave us a rating and review. And share the content with somebody who would benefit from the message. You can follow us on Instagram, Facebook, and Twitter, all @fiscallysavage. And head over to fiscallysavage.com to get our free tools, suggested reading, and everything else you need to take control of your financial life and live free.