Lesson #2 LBS Domains The Living Balance Sheet Financial Balance – the key objective The Living Balance Sheet acts as a ready-made template Offers comprehensive feedback toward all protection, asset, liability and cash flow issues Acts a a highly reliable resource Purpose of a Balance Sheet A “Balance Sheet” has been used to create a “moment in time” snapshot of a particular financial entity. Balance sheets were thought to be useful only in business situations Have become helpful in establishing the current financial condition of an individual or family. Purpose of a Balance Sheet A Balance Sheet’s structure lists all assets owned and subtracts all liabilities owed to calculate net worth. Purpose of a Balance Sheet Traditional balance sheets: • Do not forecast what might be; they create a statement of what is. • Do not take into consideration any of the factors that affect the direction in which net worth is moving or that it is likely to move in the future. Traditional Balance Sheet Assets Liabilities Riskless Assets Unsecured short-term debt cash & equivalents signature loans checking balances credit card debt passbook savings (Bank, S&L, CU) drawn lines of credit cash on hand borrowed cash values money market mutual funds money market instruments other liquid assets life insurance cash values Investment Assets marketable investments maturing investments other investment assets investment debt Job-Related Assets pension assets (vested) Personal Assets home first & second mortgages personal property loans secured by personal property vehicles collections (hobby) household goods TOTAL ASSETS _____________ TOTAL LIABILITIES _____________ NET WORTH $ Purpose of a Balance Sheet When you look at a traditional balance sheet it is impossible to tell how or where it may be susceptible to destructive forces that might affect the current and future net worth. LBS – A New Wide-Angle View “The Living Balance Sheet builds on customary balance sheet entries and offers an expanded financial perspective.” In addition to “assets less liabilities equal net worth,” the LBS adds protection and cash flow considerations to the same view. The Living Balance Sheet John Driscoll & Company, Inc. LBS – A New Wide-Angle View “People often make important money decisions in a vacuum, without considering the impact or relationship of that decision to the rest of their financial picture. This limited, disconnected view is primarily responsible for the development of unfavorable financial conditions and allows inaccurate financial myths to take root and evolve (as discussed in Lesson #1). LBS – A New Wide-Angle View The LBS avoids these problems by simultaneously considering Protection, Assets, Liabilities and Cash Flow, and by combining all four of these critical financial “domains” into a single view. These 4 areas maintain an important interdependent relationship that suggests all decisions be made from a “big picture” perspective. LBS – A New Wide-Angle View The design of the Living Balance Sheet provides you with a panoramic view, or “wide-angle lens” to look through in assessing the financial health of a prospect or client. Four Financial Domains The Living Balance Sheet is comprised of 4 broad universes, or Domains. Protection Assets Liabilities Cash Flow Each Domain has individual categories: Protection (4), Assets (6), Liabilities (4), (Cash Flow (5) EACH DOMAIN HAS A SPECIFIC ROLE IN ACHIEVING OVERALL FINANCIAL BALANCE AND SUCCESS. Protection At the very TOP of the LBS lies the Protection Domain, which acts as the “umbrella” that shelters the Asset, Liability, and Cash Flow Domains. Protection Maintaining the proper form and level of protection is critical to achieving optimum financial balance and success. The Implementation of a sound protection program should come first, and serve as the foundation before all subsequent financial opportunities are considered. Protection The primary role of insurance is to fully indemnify against losses that would otherwise create financial hardship. It is generally most desirable to insure all assets and all future income in an amount equal to their full and complete replacement value against all forms of hazards and peril. Protection It is appropriate to maintain insurance equal to existing liabilities such as short term debts, mortgages, and various taxes. Protection decisions should be properly coordinated with important legal documentation to ensure that personal financial objectives may be realized. Protection Protection Domain Rules: • Protection First • Full Replacement • Lifetime Protection Assets The Assets Domain consists of six categories: Personal Property Savings Investments Retirement Accounts, Real Estate Business Assets Assets Domain Rules: • Achieve High Overall Rate of Return • Avoid Unnecessary Risk • Maintain Sufficient Liquidity • Utilize Tax Advantaged Products and Strategies Liabilities This Domain deals with all of the various forms of Short Term Debt Taxes Mortgages Business Debt Liabilities Liabilities Domain Rules: • Avoid High Interest Debt • Implement Tax Avoidance Strategies • Consider Time Value of Money Cash Flow This Domain displays the sequential money flow in the critical areas of Gross Income Protection or Insurance Costs New Savings into Assets Liability Payments Net Income Cash Flow Most Americans inadvertently develop an improper and inefficient cash flow strategy early on in their adult lives. Cash Flow The Living Balance Sheet helps prospects and clients re-evaluate the flow of their money and how it impacts both the accumulation and distribution of wealth. Cash Flow Through efficient cash flow management across the four critical domains, prospects will have the opportunity to increase the ultimate value of their balance sheet, and improve their distribution options and opportunities. Cash Flow Cash Flow Domain Rules: • Protect First • Regular Savings (10 – 20%) • Effective Debt & Tax Management • Budgeted Lifestyle LBS Domains: Financial Interdependence Achieving financial balance and success requires special attention in all four Domains. Because of the interdependent relationship that exists between each Domain, neglecting one or more of the other Domains may lead to disappointing financial outcomes. LBS Domains: Financial Interdependence Examples of this interdependent relationship: Premature Death Lawsuit Reinvesting Interest or Realizing Capital Gains Tax Deferred Programs Maintaining High Interest Debt Canceling Life Insurance During Retirement Binding Stockholder Agreements Estate Taxes Summary The Living Balance Sheet - Delivers an innovative, comprehensive platform to properly assess all financial products and strategies. - Creates a whole new perspective on achieving financial balance and success.
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