The “Life Balance Sheet” is an Essential Tool for Your Wealth Planning
Business and professional practice owners know they cannot effectively run their company without understanding its financial position. In the same way, when it comes to making a comprehensive wealth plan, they also need a framework to assess their overall financial status.
A “Life Balance Sheet”provides a complete view of the owner’s assets, liabilities and net-worth. Though similar to the more traditional balance sheet used to monitor their company, the Life Balance Sheet includes both real and implied assets and liabilities.
The left side of the Life Balance Sheet lists the owner’s assets and includes the traditional financial assets (cash, stocks, bonds, alternative assets, etc.) and other tangible assets (real estate, precious metals, art collections, etc.). It also includes implied but expected assets.
Implied assets are non-liquid assets that are often non-tradable yet have value. In a previous article, this was referred to as, “Human Capital.” Though often overlooked, Human Capital represents the present value of the owner’s expected earnings.
Liabilities, on the right side of the Life Balance Sheet, should be viewed in the same manner. Mortgages, business loans and other debt secured by property are explicit liabilities. Additionally, business and practice owners should include their succession goals as an implied liability and career professionals and non-business owners will include the estimated costs of their retirement.
For example, if you want to maintain a certain standard of living after leaving your business or retiring from your career you are creating an implied liability that must be funded by the assets on the left side of the Life Balance Sheet. Aspirations to purchase a vacation home, start another business or fulfill a charitable commitment represent implied liabilities as well.
The following table presents a simple Life Balance Sheet showing a few explicit and implied assets and liabilities. Taken together, the traditional assets and Net Earnings (Human Capital) total $2.8MM. Expected liabilities include the capitalized expenses of paying a mortgage, funding a child’s college education and retirement.
As shown, the “client” has $1MM in Discretionary Wealth. How they treat this wealth will have a significant impact on their actual net worth, their retirement, even their legacy.
Using the Life Balance Sheet helps owners, professionals and others place a value (present value) on their implied assets (their projected earnings) as well as their implied liabilities (retirement and other costs). This information should cause owners to review all their tangible and real assets – including the value of their business – to make certain they are on track to meet their long-term goals.
 Wilcox, Jarrod, Jeffrey E. Horvitz and Dan diBartolomeo, 2006. Investment Management for Taxable Private Investors, Charlottsville, VA: Research Foundation of CFA Institute.