When a person wants to know their personal worth, they either look at their bank statements or rely on their balance sheet. While a bank statement may not provide comprehensive information, your balance sheet can give you a rough idea about the amount of debt you have in terms of your car payments, loans, mortgage, and other debts. It will also give you a general picture of the equity you have in your name, the sort of savings you have accumulated, and the value of your retirement accounts. However, the concern that arises is whether you can trust your personal balance sheet.
While it seems simple to prepare a personal balance sheet, there are areas that can be tricky. One of those is determining the real value of retirement funds because they can fluctuate and may be subject to taxation depending upon when you need to put them into use. As such, it’s essential that you update the balance of your savings and retirement funds each statement period.
Let’s suppose that, just like most individuals across the US, you have tied up your retirement funds and savings in traditional government-sponsored plans such as the IRAs or the 401(K). It would help if you figured how much tax you will be paying on that income and what will be in your hands. Since mutual funds, bonds, and stocks, are popular retirement fund investments, there is risk of value depletion right before you want to tap into them depending on the volatility of the market and the current economic situation. This situation is one reason you can’t trust your personal balance sheet to know your true net worth.
With constant fluctuations in the stock market, Americans need to ensure that they regularly check their statements carefully to understand the true and current value of their savings, such as the 401(K) and IRA. By doing so, they will be able to look at a much clearer picture, well at least on paper. Moreover, due to limited knowledge of financial management, most individuals are unable to differentiate between real wealth and paper wealth, and that is where the situation becomes slightly shaky. In such scenarios, most financial advisors suggest you maintain a personal balance sheet that you need to update at least once a year to keep a check on your progress in terms of achieving your financial goals.
By preparing a balance sheet, you will be able to review your true worth and get to know how much money is owed by you and what you own. The difference between the two will reveal your actual net worth. If net worth depicts a negative amount, you owe more than you own and prepare yourself for the financial problems you are about to face that may also open up the possibility of going bankrupt.
When you sit down to prepare your balance sheet, the current value might mislead you. To avoid being lulled into a false sense of comfort, take into account the unknowns and the impacts that will come when you are trying to access the funds, not only the current value in its current form. It is these factors that affect the reliability of your balance sheet.
The following listed are three factors backing up the statement on why an individual must not trust their balance sheet:
Facing an Unwelcomed Tax Hit
If you have $500,000 in 401(k), IRA, or any other traditional retirement account, you would be liable to pay tax on every penny that you withdraw. Yes, that’s correct, every penny! While your balance sheet may not account for this, this is a payable amount. Hence, on withdrawal of $500,000, you will be paying Big Uncle Sam $125,000 if you happen to fall under the tax bracket of 25%, which means you only keep $375,000.
Estate Impact
Let’s say you die before you were able to withdraw the entire amount from your retirement account; the amount left behind will be handed over to your beneficiaries. However, in this case, Uncle Sam will look to your beneficiaries to clear any tax amount which you may owe while also having to pay additional estate tax on the amount which they inherit.
Plunge/Soar in Market Value of Your Retirement Funds
The figures on your balance sheet in the assets column may not be available when you sell them at market value. The reason for this is that the market and economic conditions may either plunge or soar. There is no fixed certainty as to whether it will rise or plunge just when you need it.
Bottom Line
Therefore, the next time you wish to draft your personal balance sheet, don’t trust the stats that you have in front of you because the three factors listed above are enough to kill your hopes. Instead of facing a tough time in the future, it’s better to start devising a savings strategy today for which you can thank yourself in the future.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
