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Personal Balance Sheet, June 2011 ($379,354, +1.4%)

This article was written by in Monthly Update. 19 comments.


Happy Independence Day to all Consumerism Commentary readers in the United States! I’m celebrating my financial independence, as I do every month, with my regular net worth updates. These monthly reports have been a mainstay of Consumerism Commentary, with only a few lapses early on in the history of this website. For the most part, I’ve been providing these updates close to the beginning of each month, including a financial report outlining my assets and liabilities, as well as commentary about my income and expenses.

The first thing you may notice this month is that my net worth has decreased significantly from my last report. After considering feedback from readers, I’ve decided to remove all business accounts from the report. Business account balances unfairly skewed my bottom line net worth too high. While I included business bank balances, I didn’t include items like tax liability, that would have helped to provide a better picture of my financial situation.

With my new net worth calculation, there are only two ways the number can increase: either by gains in investments or by transferring profits from the business to my personal accounts — something I try to keep to a minimum. Some months I might transfer $2,000 while other months, the number is closer to $5,000. I’ve adjusted my working spreadsheet to use the new calculations going as far back as December 2004. I still maintain a calculation that includes business assets and liabilities in the spreadsheet, but that information won’t be public for now.

Keep reading this article to see the new numbers.

I created the above report using data from Quicken, which contains every financial transaction since 2002. A few years ago, I stopped tracking my cash transactions as closely, though. They constitute a small percentage of my overall spending. Tracking every expense down to the cent is no longer my priority, though at the beginning, it was very helpful to move my finances in the right direction. I export the data from Quicken into a spreadsheet. I’ve recently upgraded from an old version of Microsoft Office to the latest OpenOffice, so there may be a slightly different look to the reports.

This net worth template will work well either in Microsoft Excel, OpenOffice, or even Google Docs.

Cash in banks

This category now includes only my personal saving and checking accounts. The bulk of cash I’ve reported in the past resides in business accounts. If you’ve viewed previous reports, this accounts for much of the $600,000 decrease. I’ve updated my spreadsheet to have an accurate history using the same revised calculation, but I’m not changing past reports on Consumerism Commentary. These numbers won’t tie to past posts, but they do tie to the spreadsheet I keep, that always uses a consistent calculation.

Investments and retirement

The investments line includes all my non-retirement investment accounts. About half of this balance is my employee stock account (from my prior employer), wherein I sold a good portion of the stock on Friday. Just about all of my investments were down this month.

Accounts receivable

Now that my business is not included in this report, accounts receivable basically reflects whenever someone owes me money. This is not a common occurrence, so this line will be zero or missing most months. My business accounts receivable reached a record high as of the end of June, strengthening that asset. The $600,000 decrease in my net worth that occurred by removing business accounts consisted of the removal of the cash accounts, as mentioned above, and from the accounts receivable.

2004 Honda Civic

My car passed 133,000 miles this month, and it’s still running well. I mentioned last month I was planning to schedule maintenance, including a regular oil change and tire rotation, but I haven’t had a chance to do so yet. That’s on my calendar for this week.

Credit cards

I pay off credit card balances before the bill is due, ensuring I don’t accrue any interest or late charges. Mistakes happen once in a while, and I’m not immune to scheduling a payment incorrectly. I’ve managed to avoid this for a long time, but the good news is one mistake shouldn’t damage my finances.

Looking forward

While business income should be strong this month, the nature of my new net worth report doesn’t really take that into consideration. My personal expenses should be fairly normal this month, but I am planning a small vacation to a lake in upstate New York later this month. I expect my personal expenses to be higher than usual this month to cover the costs of travel.

With the flexibility I have today, particularly the ability to take as much as I need from business income to meet my personal expenses, measuring my net worth from month to month with this new calculation may give a truer picture of my personal finances at any moment, but the numbers have less meaning. I can easily manipulate the performance of my net worth by increasing or decreasing transfers from the business. While there are consequences to this, particularly due to taxes, adding 1% to my bottom line is not really much different than adding 5%. Even if I leave more money in the business and my net worth decreases from one month to the next, I wouldn’t be able to consider that a problem when I know cash is available in the business.

At the minimum, I transfer enough from the business to personal accounts for my Individual 401(k) and SEP IRA; the cash transfer is variable depending on what I need for the month. One way to fix this problem would be to assign myself a steady salary.

Including the business accounts, June’s net worth would be $994,884, reflecting a 15.6% increase over May.

What do you think of this new way of reporting my net worth? Is it more helpful to see what is truly in my personal accounts rather than including business accounts in the same calculation? Is this a better representation of my finances?

Updated March 6, 2012 and originally published July 4, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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Points: ♦127,485
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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 19 comments… read them below or add one }

avatar Sarah @ Making Me Better ♦42 (Newbie)

I don’t think this method gives an accurate picture of your net worth, for the reasons you yourself pointed out; you can just pull more or less from your business accounts.

Maybe you could do it as you were doing before, but break it down into separate sections for your personal and business accounts?

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avatar Pat S

Are you a homeowner? I don’t see real estate included in this calculation?

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avatar Luke Landes ♦127,485 (Platinum)

No, I rent my home.

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avatar Krantcents

Do you show the net profit from your business in your new personal net worth? Since that is your only source of income, you cannot leave it out.

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avatar Luke Landes ♦127,485 (Platinum)

As people pointed out last month, the full profit of the business isn’t really accessible, and only distributions from the business should be included in my net worth. I haven’t fully decided, but including the full business profits definitely overstates my net worth.

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avatar Paula

I like that you’re not including business profits in your personal net worth statement … if you pulled money from your biz account to your personal account, and then your biz came into a cash-flow problem, you’d most likely just fund the biz from your personal account … which means you’d be moving money between accounts for no reason. It’s better to keep the money in your biz account, and conceptualize it as business money.

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avatar Bobka ♦13 (Newbie)

I believe it was a good decision to pull out your business assets from the net worth calculation. You might also want to consider making this calculation less often – perhaps quarterly or semi-annually. If the purpose of calculating is to keep score on how you are faring for the long term, why subject yourself to short-term record keeping and all the emotions that go with shorter term swings in the value of investments?

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avatar Luke Landes ♦127,485 (Platinum)

A monthly look-in might not be as necessary for me as it once was. I’ve tossed around the idea of producing these reports only once a quarter, but it does force me to take a look at my spending which I do on a less frequent basis than when I tracked every transaction every day, including what I spent using cash.

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avatar Financial Samurai

Howdy Flexo,

You should definitely count the value of your business in your net worth based on your percentage ownership. Do you own 100% of it? If so, just add a new line item that says “Business” and attribute your ownership value. It’s an asset, just like how we list out stock investments.

May I ask a couple questions on mingling business with personal though? As the owner, how much of the after tax profits are you allowed to transfer to your own account? Is there some sort of ratio or guideline? If there’s a limit, how does an owner get that money back besides paying a salary or dividend if it’s a private company? Can you declare a nice one time dividend payout for example
Regarding buying a house, can you actually use the company cash to buy you a house as the majority shareholder?
Just wondering how the lines are drawn as I build my own company. I dont want to get in trouble using company funds to fund my personal lifestyle. But, at the same time, it’s my company and it’s your company.

Thanks for helping clarify and congrats on the progress!

Sam

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avatar Luke Landes ♦127,485 (Platinum)

Hi Sam,

Even to do as you suggest would require putting an ownership value on the business, which, aside from the strange nature of valuing a business that would be murky enough for me to assign any value to that line, is something I would not make public. We’re talking about something different than an accounting of business bank balances — when you talk about the value of a business, you’re talking about what you’d want a Google or a Microsoft to pay you to acquire it.

As far as what you’re allowed to transfer to your personal account… as far as I know you’re allowed to transfer as much of it as you want. Of course, if you frequently transfer money back and forth, any personal asset protection you think you might have is gone. That is, if someone sues the business, they can easily get to your personal accounts. But for me it’s just a question of ho much the business profits are retained earnings, and how much is salary, because there is a tax difference. You can use “company” cash to buy yourself a house, but that “company” cash now becomes “your” cash.

I’d suggest you get in touch with a tax accountant familiar with the type of business you intend on having.

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avatar Financial Samurai

Thanks Flexo. Yeah, it sounds like we are restricted from taking a certain amount of money out after one’s salary given retained earnings don’t pay employed tax. I can see how things can get tricky. That would be sweet if you can get your company to buy you the house and avoid paying the employment tax! Would be a nice company expense! Will talk further with my accountant and see what he says and will let you know.

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avatar Investor Junkie

Sam,

What flexo is talking about what is known as “piercing the corporate veil”. You NEVER want to do that! Never ever never! This means your business expenses should remain within the business and your personal expenses are done through personal accounts. This means you DON’T buy food with your business credit card. This means you don’t cut a business check to pay your home mortgage.

What you do is you take a salary from the business and deposit it into your personal account (no different than working for someone) The simplest way to think of it is your business as not your own but owned by someone else. Do the same actions as if you didn’t own it. There are means to take a salary and corporate profits (which can be taxed differently). Of course they are some legal presidents that if you took too much in corporate profits and not enough in salary that might trigger an IRS audit.

Regarding buying a house. Yes you could buy a house through a business, as long as it’s used for business purpose. Meaning if you bought a residence and rented it out to others, that’s perfectly legal. The issue comes down to though, does the business have a enough good credit to buy the property? In many cases you personally have to guarantee the loan, which means if you default on the loan you are still responsible for it, regardless of if you have corporation.

What Flexo is doing is minimizing the amount of salary (which is taxed normally), and maximizing the amount of tax sheltered within his business.

Bottom line, like Flexo stated, a good accountant should help guide you along the way with recommendations.

Hope this helps.

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avatar Financial Samurai

Very interesting! I guess that’s why some executives get in trouble from what we see in the news. I can see the temptation.

So how does a small business owner buy any substantial asset like property then? I assume every S-Corp owner tries to pay themselves as little as possible to avoid the employment and other taxes. But, if you have a small salary and the company can’t buy you things not related to the business, seems impossible to buy a thing.

I’ve heard many stories of small business owners getting rejected from a mortgage bc the bank deemed their income stream too unstable and risky. Is there a point where you overmazximize the tax shelter? Like, what’s the point after a while if you’re not spending?

Thx,

Sam

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avatar Investor Junkie

@Sam:

Yes it can be MUCH harder to get a personal loan when you are self employed. Previous NINJA loans made it easy and originally for this purpose (NOT for people who could outright lie about income). Previously I never had this problem, but I haven’t gotten any new loans since the 08. Like your own personal credit you also must build up your business credit. Your business has a credit score just like you do. Dunn & Bradstreet is the primary company that does biz credit checks.

You are correct though, if you are single in some ways you are better off having a job with some full time company. Though if you are like me, who is married, having a spouse who works fulltime is the same thing (in which they can cosign loans).

Though IMHO with taxes going nowhere but up, and credit remaining tight (even if you work fulltime) for the foreseeable future. I personally think we all should be trying to minimize our taxes (legally)

If you look at someone like Warren Buffett, there is a reason why he only takes a $200k/yr salary (regardless of his Democratic viewpoint about taxes). Everything his does is to minimize taxes. Don’t let his progressive statements fool you.

avatar qixx ♦1,890 (Half-Dollar)

I like the suggestion of setting a salary for yourself. You should also set up a bonus schedule based on how the business is doing. For my side business i pay myself (or others when hired) a set amount based on the work load. Essentially i contract the work out, whether it is me or someone else doing it.

Flexo, Here is my monthly update.

Assets $16,368.53
Liabilities -$38,483.37
Total -$22,114.84

Last month’s total -$22,131.44
Change to last month $16.60
Not much change but it is going in the right direction.

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avatar Luke Landes ♦127,485 (Platinum)

Thanks for the update, qixx!

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avatar Tony

Flexo. You should definitely keep Personal and Business Accounting separate. By the way, is your business inside an LLC? This is the best way to protect your personal assets in case of a lawsuit. As far as reporting on this blog you could report both Business and Personal Networth separate. I agree with you that reporting only your personal networth now would not have any value because you can manipulate it any way you want. By reporting both you keep yourself honest.

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avatar Evan

I like this way better only because the valuation of Consumerism Commentary is VERY hard to peg down (outside of cash actually kept in the business and I can understand how that gets a little murky).

It is unlikely someone will buy Consumerism Commentary without Flexo – you are the site…sort of like selling a professional practice (i.e. doctor or dentist).

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avatar Investor Junkie

I’ve seen many blogs sold though that were similar to Flexo (identified by the owner) in which the owned bailed and someone else took over. Some have done pretty well, others not so much.

Though maybe not as big or as trafficked.

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