Components of the Personal Financial Model
Each client’s financial models are completely unique documents customized with detailed information from his or her actual situation. The information gathering process we employ is comprehensive, systematic, and detailed. The integrity of the models depend upon the quality of information within them.
Each plan contains Annual Income, Annual Expenses and Annual Asset Values. Together they constitute a combined cash flow and asset statement, with projections over a specified period of time
Annual Income
This section includes information on sources of income, such as salary and bonuses, consulting payments, director’s fees, commercial and residential rental properties, qualified plans, notes receivable and asset liquidations.
We also include income from discretionary investments such as interest earning bank accounts, stocks and bonds.
We gather detailed information about how each of these income sources is structured so that we can project how they will change over time. For example, bonus income may be tied to business profits. Maturing bonds will make additional cash available. Qualified plans begin distributions at specific levels by a certain time.
Annual Expenses
Personal expenses include such categories as standard of living and home mortgage. Personal Models may include business expenses for business-related assets owned personally. This section also includes federal and state income tax, capital gains and gift taxes.
Discretionary Cash
We subtract the client’s Annual Expenses from the Annual Income to determine the client’s level of discretionary cash for each year of the model. At times when income is insufficient to meet expenses, the model assumes the liquidation of assets from the personal investment pool. The investment pool is increased when Annual Income exceeds Annual Expenses.
Annual Asset Values
The Annual Asset Values section shows our clients’ current net-worth and changes in it based on the changing value of each asset. This section includes the value of the home, second or vacation homes, commercial real estate, the company, investment properties, qualified plans and personal investments. We use agreed-upon assumptions to project the future value of these assets. This section is essential in analyzing the estate and gift planning consequences of business transition alternatives.
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