A perennial problem involves clients insisting their personal assets such as cars, furniture, white goods, favorite CDs from the seventies, and so on, are assets for financial planning purposes and should be included in the client’s summary of financial position.

The client’s preferred position may look like this:

Table summarising financial position

Home

$600,000

Super (CARE)

$40,000

Cars (cost)

$36,000

Household effects (cost)

$100,000

Total assets

$776,000

Home loan

$450,000

Credit cards/personal loans

$22,000

Net position

$304,000

Debt as a % of assets

60%

Fair enough, you might say. But the problem is cost is not value. Its a different concept. Appreciating assets will typically have a value greater than cost, and depreciating assets will typically have a value less than cost. Cost is a historical amount, the sum of the financial resources outlaid to acquire an asset. Value is more in the present, what you would get if you sold the asset now, as a willing but not anxious seller, to a willing but not anxious buyer with both buyer and seller having full information about the asset.

This table mixes up cost and value, and disingenuously compares oranges to apples. The results will always be misleading, and in this case overstate the client’s net assets to create an overly optimistic picture. 

You cannot show appreciating assets (such as the home and super) at cost and depreciating assets (such as the cars and household effects) at value. Everything has to be shown at value. One rule for every asset.

When you show all assets at value, ie when you compare oranges to oranges, the client’s financial position changes dramatically.

The position may now look like this:

Table summarizing financial position: values only

Home

$600,000

Super (CARE)

$40,000

Cars (value)

$16,000

Household effects (value)

$20,000

Total assets

$676,000

Home loan

$450,000

Credit cards/personal loans

$22,000

Net position

$204,000

Debt as a % of assets

70%

Our preferred view is to eliminate personal assets altogether. This is because, practically speaking, personal assets cannot be used for investment purposes. Virtually everyone needs a car, basic household goods and their favorite CDs no matter their circumstances. They are almost always not worth much.

They may cost a lot when your client goes out shopping for that new car, that couch or that fridge. But wait and see what happens if you have to sell them second hand, in a hurry, to get in cash. You quickly learn that value is different to cost, and almost always much less than cost.

Its best to leave personal assets out of financial planning and only consider your client’s investment assets.

The position may now look like this:

Table summarizing financial position: investment assets only

Home

$600,000

Super (CARE)

$40,000

Total assets

$640,000

Home loan

$450,000

Credit cards/personal loans

$22,000

Net position

$168,000

Debt as a % of assets

74%

We now have a meaningful summary of the client’s net wealth position and a good idea of the true debt relative to the assets

These figures tell a different tale. They do not over-estimate the client’s wealth position, give a more realistic basis for decision making, including optimum future debt levels, and more accurately predict the client’s ability to save money and accumulate wealth, based on past performances.

An exception for Centrelink clients

An exception can be made for Centrelink advice. Here $10,000 for household effects seems to be a de-facto standard, and it, or something near to it, can be used in these limited circumstances for these limited purposes. 

In other cases where Centrelink clients have personal assets that do have a significant value, for example, a $100,000 four wheel drive and a $60,000 luxury caravan, then you should consider a separate table clearly labelled “Non-investment assets that are assets for Centrelink purposes”, or something similar.

Variations on this suggestion are possible. The key point is not misrepresenting the value of personal assets, so your advice is clear, concise and effective and more likely to be acted on by your client.