Your cash surplus and balance sheet

When you are doing an "audit" of your current financial situation two things are important:

1. What surplus income do you have at the end of the month?
2. What assets do you have? In other words what is in your balance sheet?

You surplus income is the money you have left over when you have paid all your bills and had a good time. So for example at the end of the month you have $1000 left in your bank account. What can you do with this? You could save it in the bank. If you are living in Japan this will get you next to no interest. 0.1% or something like that. My advice would be to invest some of it. Not all of it but maybe a maximum of 50% of it. This of course in some kind of investment that suits your risk profile and your time line.

When you are going through your balance sheet there are three sections you should include:

1. Fixed Assets
2. Medium Term Assets
3. Current Assets

Your fixed assets are for example your house, any investment property you may have, another example would be do you have any private equity investments? These assets are generally classified by the fact that they can take a significant period of time to turn into cash.

Your medium term assets are anything that is building for your future. For example retirement plans, saving plans, stocks (shares), long term cash deposits etc.

Your current assets are your cash in the bank or under the pillow whichever the case may be.

When you add up these numbers you will get an understanding of your net worth.

Next time we will look at these numbers and see how they fit into your financial plan.

Investing 101 (Part 4)

We now have a good understanding on the different asset classes. As a reminder they are:

1. Cash
2. Bonds
3. Equities
4. Property
5. Commodities
6. Collectibles

As a financial adviser unfortunately I can not tell you which asset class to put all your money in. Obviously the best way to make money would be to put it all in the one asset class that goes up the most. Unless you have a crystal ball it would be almost impossible to predict what asset class that is. (If you do have a crystal ball, may I borrow it for a couple of days please?)

So what I can tell you that in the short term I do not know what asset class will go up the most. But what I can say is that over the medium to long term equities should always outperform bonds and bonds should always outperform cash. If this doesn't happen then the whole capitalist system is on the way out.

My job as a financial adviser is to find out about your current situation and then to blend your assets to meet your short, medium and long term financial goals.