PrevNext

Protect Your Balance Sheet

RULE: Protect Your Balance Sheet At All Costs

There is no point making an effort to grow a balance sheet unless you protect it from decay. This decay has many sources;

 

Protect Balance Sheet

  •  YOU. Dipping into funds because you want to buy something or are short of money. Lock your money away for pre-determined periods, 6 months at a time is ideal. Have two or more signatories on your cash accounts, that way you can keep each other honest. Another way to protect your balance sheet is to store it in low liquidity investments like property as it takes quite an effort to release the cash. Work on your self-discipline and delayed gratification if you are having difficulty in this area.

  • HIDDEN EXPENSES. Sometimes there are things you didn’t anticipate when holding a balance sheet item (e.g. an investment property). Things like damage, maintenance and taxes may have been overlooked. Ensure you have adequate contingency funds built into your budget and you have warranty, pre-paid maintenance and/or insurance.

  • THEFT. Keeping cash in the house is an obvious no-no, but also be aware of scams and confidence tricksters. Again insurance will lessen the impact, but I’ve learned a good bit of advice – ‘Always do deals on your own terms’. You should always initiate deals and never succumb to an offer presented to you no matter how good it seems, you are in control when you initiate, and vica versa when someone else initiates the deal. Having someone steer you through a deal is like driving blindfolded, possible but very risky.

  • DEPRECIATION. Minimise your purchases of assets that don’t provide a positive return on investment. Buying a car will on average loose you 50% of its value every three years. Consider a Porsche bought for $200,000 and watch its value go down the drain by $100,000 in 3 years. This is not so bad if you can claim this asset's depreciation against your income, or your passive income pays the lease.

  • INFLATION. This is most often overlooked. Ensure that the average rate of return for all your investments exceeds the annual inflation rate. For example, if you are earning a 5% return overall but inflation is 6% per annum, then in effect you are losing 1% per annum.