What is a Personal Financial Statement?
A personal financial statement is a detailed document or collection of documents that gives a snapshot of an individual's financial standing at a given point in time. As such, it can serve as a tool for assessment of the state of your financial health by clearly listing your assets, liabilities, income, and expenses. Normally, such a statement usually comprises two primary sections-the balance sheet and income flow statement.
The balance sheet section is a summary of what he owns (assets) and owes (liabilities), so that when these are subtracted, there is a net worth figure.
An income flow statement is a basic tool in tracking sources of income and outgoings in a given period - monthly or yearly - which indicates the inflow and outflow of money.
How does it work?
You can either prepare financial statements for companies or individuals. In case it is prepared for an individual, it is called a personal financial statement, which is simply an understudy of the corporate financial statements. These two categories essentially have the same objective: to measure and represent the financial health of the subject.
A personal financial statement focuses on an individual's net worth, that is the difference between liabilities and assets. In case one was to sell all what he owns and apply all the money so acquired against all his debts, what remains in his account will be his net worth. If liabilities exceed assets, the statement would post negative net worth otherwise, if assets are greater than liabilities, this would indicate a positive net worth.
A personal financial statement is kept current in monitoring changes in financial health over time. This is the golden tool for those wishing to make improvements to their financial circumstances or when seeking credit, such as loans and mortgages. Consumers will be able to avoid unnecessary credit report inquiries and the frustration of getting rejected credit applications by knowing their financial position.
The personal financial statement also helps in the understanding of the credit officers in evaluating loan applications. This is a kind of document that helps an applicant to present a clear snapshot of his status regarding finances. In most loan considerations, one is asked to present a guarantee or pledge some valuable assets as collateral before the loan is granted. The statement made this whole process easier.
Why Use a Personal Financial Statement?
A personal financial statement is an essential tool for organizing and planning finances, especially for individuals who are just beginning their financial journey. It provides a clear and comprehensive overview of one’s financial position, helping to assess where they stand and where improvements are needed. By listing all assets (such as cash, savings, investments, and property) and liabilities (such as loans, credit card debt, and mortgages), a personal financial statement paints an accurate picture of net worth.
For young professionals entering the workforce for the first time, a personal financial statement can be especially valuable. These individuals are often new to financial planning and may feel overwhelmed by managing their income, expenses, and savings. A simple personal financial statement offers a straightforward starting point, making it easier to set and achieve financial goals. Whether the goal is saving for a major purchase, paying off student loans, or building an emergency fund, this document helps track progress and ensures financial decisions are aligned with long-term objectives.
Additionally, a personal financial statement can be used to create budgets, assess spending habits, and identify areas for saving or investing. It can serve as a guide for making informed decisions about retirement planning, home ownership, or debt repayment strategies. Over time, regularly updating the statement allows individuals to see how their financial health evolves and take proactive steps to stay on track.
Example of a Personal Financial Statement
To better understand how a personal financial statement works, let’s look at an example.
Personal Financial Statement for John Doe
Date: October 1, 2024
Assets:
- Cash and Cash Equivalents:some text
- Checking account: $5,000
- Savings account: $10,000
- Emergency fund: $3,000
- Total Cash and Equivalents: $18,000
- Investments:some text
- Stocks and mutual funds: $12,000
- 401(k) retirement account: $20,000
- Roth IRA: $8,000
- Total Investments: $40,000
- Personal Property:some text
- Car (current market value): $15,000
- Home (market value): $250,000
- Total Personal Property: $265,000
Total Assets: $323,000
Liabilities:
- Short-Term Liabilities:some text
- Credit card debt: $3,500
- Personal loan: $5,000
- Total Short-Term Liabilities: $8,500
- Long-Term Liabilities:some text
- Auto loan: $10,000
- Mortgage: $180,000
- Student loan: $25,000
- Total Long-Term Liabilities: $215,000
Total Liabilities: $223,500
Net Worth:
To calculate net worth, subtract the total liabilities from total assets:
Net Worth = Total Assets - Total Liabilities
Net Worth = $323,000 - $223,500 = $99,500
In this example, John Doe has a net worth of $99,500. By regularly updating his personal financial statement, he can monitor his financial progress and make informed decisions to improve his net worth over time. If his liabilities grow, John may need to adjust his spending or prioritize paying off debt. Alternatively, as he saves and invests more, his assets will increase, improving his financial standing.
This simple format offers a snapshot of John's financial health, helping him plan for the future.
Conclusion
A personal financial statement is an invaluable tool for managing your finances and understanding your overall financial health. It provides a clear picture of your assets, liabilities, and net worth, making it easier to track progress, set financial goals, and make informed decisions about your future. Whether you're a young professional just starting out or someone looking to improve their financial situation, regularly updating your personal financial statement can help you stay on track and identify areas for improvement.
For those seeking smart investment opportunities, incorporating tools like personal financial statements can also help when exploring higher-yield options. For example, investing in Compound Real Estate Bonds (CREB) can be an effective strategy to grow your net worth. CREB offers an 8.5% APY and allows for flexible features like auto-investing and round-ups, which can help investors earn fixed income with no fees and anytime withdrawal options. By integrating CREB investments into your personal financial plan, you can diversify your portfolio and make your money work harder for you.
