My Financial Profile – Asset Weighting

 

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Welcome back! So far you have completed your Income and Expenditure and Balance Sheet. Now it’s time for the last part, Asset Weighting.

Take a look at the last tab of My Financial Profile. It’s not as confusing as it may look. The percentages in the left-hand column are simply a guide. This is what I would recommend as a good balance between fixed, medium term and current assets.

You will see that the recommendation is for 10-20% in net fixed assets. For most people, this is held in their own home, and it’s not possible to sell half a house if you suddenly need some liquidity. If you have expertise in property and want to hold more than 20% in net fixed assets, particularly if it’s generating you a nice income, that’s perfectly fine. The 10-20% is just a guide.

I have also indicated 10-20% as the recommended weighting to current assets. What we are really talking about here is your Emergency Cash Reserve. (see here if you need a reminder what this is) We are currently in a low-interest rate environment, and I don’t see great benefit in holding lots of cash, particularly if you live in Japan, where interest on bank deposits is near zero. One reason you may hold a larger weighting of cash is if you are saving for a deposit on a home. This money is really just waiting to be moved to the net fixed assets part of your balance sheet.

This leaves 60-80% in medium term assets, which is anything you are saving and investing for your future. It’s quite rare that I meet people who already have this weighting in medium term assets. If you are just getting started then it may in fact be very low. Even people on high incomes are often highly concentrated in cash and their own home.

So now it’s time to input the numbers from your balance sheet. Under Asset Weighting, Amount, in the third column, enter the totals from your balance sheet for Net Fixed, Medium-term and current assets. Circle whether you already have your Emergency Cash Reserve covered. (Y/N)

Now you can total your Net Worth. Hopefully you like the number you see here, but remember it’s a work in progress.

Now it’s simple to work out your current weightings as a percentage in column four. If you have $200,000 in fixed assets and your total net worth is $1,000,000, then your fixed asset weighting is 20%. (200,000 ÷ 1,000,000 x 100)

So how does your asset weighting look? Is it close to the guide in the left hand column? Are you heavily overweight in a particular area? If so, then the Target Weighting in column five is your action plan. Here you can input the way you want it to look.

For example if your current weighting looks like this:

  • Fixed assets – 10%
  • Medium-term – 10%
  • Current – 80%

Then perhaps you need to adjust your target weighting to:

  • Fixed assets – 10%
  • Medium-term – 70%
  • Current – 20%

This means you need to invest some money! There are two ways to do this: obviously you can take money from your current assets and invest it to balance things out. You can also take money from your monthly surplus over expenditure and invest that every month.

The lower box will help you to determine where your current disposable cash flow goes each month. In the left-hand box, insert your monthly / annual net disposable income. This is the last number on the income and expenditure page. Now you can examine where this money actually goes every month. Is part of it making extra payments on your mortgage? In that case it’s going into net fixed assets. Does it just go into your bank account and sit there? That would explain how you got to be overweight in cash!

It’s surprising how many people I meet where their disposable income flows 100% into current assets. I would encourage these people to consider investing on a monthly basis – the column for Future Amount is where they can decide how much to contribute each month.

As a general guide, the maximum amount I think you should contribute to medium term assets from your monthly surplus is 50%. Simply put, if you are saving $2,000 a month, and it’s all going into cash, then you can consider investing up to $1,000 per month into medium term assets. Any more than that and you may run into trouble if suddenly hit with an unexpected expense, or drop in disposable income.

Hopefully this is all clear and you have completed your asset weighting and understood what changes you need to make. Please let me know if you get stuck!

 

 

 

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