Manage Your Money Like a Banker

What do banks do with their cash? Well if you look at the assets on the Bank of america balance sheet you will see a summary of their assets and liabilities. You can find Bank of America’s balance sheet at Morningstar.com.

The balance sheet basically shows the assets of a company , the liabilities of that company and what’s leftover for shareholders, also known as shareholders’ or owner’s equity.

Assets are everything the company owns or controls that has economic value. Liabilities are everything a company owes or is obligated to pay, the opposite of an asset. When everything that’s owed is subtracted from what’s owned, retained earnings are left for the shareholders.

What You Can Learn From Bank of America

• Own More Assets than Liabilities

This bank is still in business because they are able to cover all of their liabilities with assets. In this instance their asset to liability coverage is about 1.12. That means they have about one dollar and twelve cents in assets for every dollar in liabilities. Your goal should be to do the same. If you drowning in debt you need to reduce your liabilities. If you cannot control your debt you might turn to totalbankruptcy.com chapter 7 or chapter 13 for a quick solution. Overall your goal should be to reduce your liabilities and increase your assets. Your net worth is a measure of assets to liabilities. Positive net worth is the first step to financial freedom.

• Don’t Put All of Your Eggs in One Basket

The assets that Bank of America owns are spread over various asset classes. There are lower risk federal funds, riskier trading account assets, bonds and debts owed to them in the form of loans & leases. Diversification is important to lower the overall risk of your financial portfolio.

• Timing is Everything

The liabilities owed by Bank of America are not all due at once. They have various maturities or due dates. Deposits are typically checking accounts that see lots of transactions each day, federal funds and trading accounts typically have maturities within the range of a few days. Commercial paper due dates will vary but are typically longer term and long term debt is, well long term. You can do the same for your own liabilities by timing the due dates of your monthly bills or long term loans. Spreading the due dates out during the month can positively affect your cash flow situation. Try out the free services at Mint.com that will help you get control of your cash flow.

Most Americans will say that the banks were the cause of our recent financial crisis, but there is plenty to be learned from them. And I’m sure if we could have a bailout to fall back on it would have been a lot easier for most Americans to bounce back from the recession.

Update 3/7/2011: This article was featured in the Wealth Builder Carnival over at MyWealthbuilder.blogspot.com!