You can build a future that is secure and satisfying by keeping track of your finances. A personal financial statement can help. A personal financial statement is a snapshot of your current financial situation. It can help you in many aspects of your life.
Table of Contents
Why you need a personal financial statement
How a Personal Finance Statement Can Change Your Money Behavior
What is Included in Personal Financial Statements?
What to exclude from a personal financial statement
How often should you update your personal financial statements?
Personal Financial Statement vs. Business Financial Statement
How to increase your net worth
How to prepare personal financial statements
Why you need a personal financial statement
You may create a personal statement for a number of reasons. You can use it if you want to:
Borrow money.
You can apply for financial assistance.
Make a promise.
Plan your retirement, estate planning, college savings or any other financial plan.
Rent a commercial office, or any other type of business space.
Reduce your tax burden by developing strategies.
Run for office
Track your credit.
Idealy, your financial statement should show a positive networth and assets that are greater than liabilities. You can then position yourself as someone who is responsible and knows how to manage money. This may also show that your finances are thriving.
How a Personal Finance Statement Can Change Your Money Behavior
Personal financial statements can help you to better understand your finances and how you manage them. You’ll see that your past and future behavior has a direct impact on your net worth. It tells you if you are on track to reach your financial goals. If you have a high net worth, it may indicate that:
Buying your dream home or a rental property.
Early retirement.
You can work part-time to spend more time with family.
Spending more money on a cause you care about.
How to fund your child’s college education
A low or negative net value can be a wakeup call. This figure may give you the motivation you need to make changes in your spending habits and change your behavior. If you are unhappy with the figure, it may motivate you to take on a part-time job, pay off debt and adhere to a strict budget.
What is Included in Personal Financial Statements?
Your personal financial statement will consist of three main components:
Balance Sheet
The balance sheet will show your net worth, including all your assets and liabilities. Your home, car and savings or investment accounts may be considered assets. Your mortgage, auto loan, student loans and credit card balances could be liabilities. The balance sheet will show the difference between the value of your assets and what you owe in liabilities. This is a good representation of your networth.
Income Statement
Your income statement should include your salary, bonuses and commissions. You’ll also need to include any other income, such as interest, dividends, or a side-job. In addition to your insurance payments, taxes and other cash outflows, you will include this information in your income statement. Your income statement will help you determine if you are spending more than you make and how you can improve your financial habits.
Cash Flow Statement
Cash flow statements show how you spend money. The cash flow statement breaks your money down into three categories: fixed expenses that are not discretionary, variable expenses that are non-discretionary, and fun money. The Cash Flow Statement fills in the information gap between the Income Statement and Balance Sheet. Cash flow statements can be used to determine if you are on the right track to achieving your goals and building wealth.
What to exclude from a personal financial statement
Let’s now discuss what personal financial statements should not include. You will not find any assets or liabilities related to your business in your personal financial statements. Only a loan to your business, or any other item you are directly responsible for is an exception.
Rent or other personal items like furniture or household goods are not assets. Their value is usually too low to include them.
How often should you update your personal financial statements?
Your work does not end once you have prepared your first personal financial statement. Your personal financial statement will need to be updated frequently, as your finances are likely to change on a regular basis. Every month or every two months, you should review and update your financial statements. You’ll be able to make necessary adjustments in your saving and spending habits if you are always up-to date on your financial situation.
Personal Financial Statement vs. Business Financial Statement
In most cases, business financial statements consist of a balance sheet and a profit-and-loss statement. Personal financial statements consist of a balance, an income statement and a cash flow statement.
A business financial statement can help you start or grow a business, and you can also get small business loans. Personal financial statements, on the other hand, are more focused on you and your life. They can help achieve your financial goals, such as buying a home, retiring or sending your kids to college.
How to increase your net worth
Your net worth is the difference between your assets and liabilities. Net worth can be low if you have many assets but also many liabilities. You can also have minimal assets, but no liabilities. This will result in a solid net worth.
What is your ideal net worth? Your age, lifestyle and comfort level will determine your net worth. No one can agree on a number. You can, however, use the formula created by Thomas Stanley & William Danko (authors of “The Millionaire Next Door”) to estimate your net worth. Net Worth=AgeXPretax income/10. According to this formula, if your pretax income was $60,000, and you were 35 years old, your ideal net wealth would be $210,000.
This is only one way of looking at your networth and does not mean you are struggling financially if your net worth is below $210,000. What you consider a comfortable net worth is what matters.
Don’t be alarmed if your financial statements show that your networth is lower or in the negative than you would like. You can do a number of things to increase or improve your net worth. Here are some suggestions.
Reduce Expenses – The less you spend, the greater your ability to save and invest. Look at your budget to see where you can cut or eliminate expenses. You can cancel your gym membership if you don’t use it very often. You can cook more at home if you are prone to spending too much money on eating out. Even a few dollars can add up over time and increase your overall net worth.
Find New Sources of Income: If you’re not earning enough money at your current job, consider other ways to make money. You may consider taking on a freelance job, or a second position, depending on your schedule and preferences. You may have many things that you don’t need or want anymore and you can sell them through Craigslist, Facebook Marketplace or other online marketplaces.
You can save for a home if you are currently renting. Mortgage payments allow you to accumulate equity which will increase your networth. You should choose a house that is within your budget or lower. If you don’t, then it could become a liability instead of a tool for building wealth.
Create an emergency fund: Life happens and you may find yourself in a situation where your car breaks down or your roof needs to be replaced at a time when you least anticipate it. It’s useful to have an emergency account in these situations. You can avoid debt by having an emergency fund to cover unexpected expenses. Financial experts generally recommend saving three to six month’s worth of expenses in an emergency fund.
Reduce or eliminate your debt. It’s not easy, but you should try. Included in this are your student loans and mortgages, as well as credit card debts, car payments, and any other debts you pay monthly.
Investing: The earlier you start investing, the better. Once you’ve built up an emergency fund, you can invest it to make money. Consider investing in a 401(k), Roth IRA or Traditional IRA.
Get insured: Insurance will protect you from financial hardship. Insurance such as life insurance, health insurance, and car insurance can be a great investment to protect you (and your family) financially. Bestow offers affordable term life insurance, and Lively has a health saving account.
How to prepare personal financial statements
You have two choices if you want to prepare a personal financial statement. You can complete the statements yourself by following the DIY method. There are many templates that you can use to guide yourself through the process.
You can also hire a coach or consult with a financial adviser. You can get the professional guidance you need in order to create accurate and thorough personal financial statements. A financial advisor can review your statements and give you the peace of mind that they are in good condition.
A financial advisor can help you to increase your networth. They can then make the appropriate recommendations based on your specific situation and guide you towards a happier, healthier financial future.
This article was originally published on Wealth of Geeks. It has been republished by permission.
