How to Create and Use a Personal Financial Statement
A personal financial statement is a document that summarizes your financial situation at a given point in time. It shows your assets, liabilities, income, and expenses, and helps you calculate your net worth and cash flow. A personal financial statement can be a powerful tool for managing your personal finances, planning your goals, and applying for credit. In this blog post, we will explain what a personal financial statement is, why you need one, and how you can create one easily.
What is a Personal Financial Statement?
A personal financial statement is a document that lists all your personal assets and liabilities, as well as your income and expenses. It is usually divided into two sections: a balance sheet and an income statement.
Balance Sheet
The balance sheet shows your assets and liabilities at a specific date. Assets are things that you own, such as cash, bank accounts, investments, retirement accounts, real estate, and personal property. Liabilities are debts that you owe, such as credit cards, student loans, mortgages, car loans, and taxes. The difference between your assets and liabilities is your net worth, which represents your financial value.
Income Statement
The income statement shows your income and expenses over a period of time, such as a month or a year. Income is money that you earn, such as salaries, bonuses, commissions, dividends, and interest. Expenses are money that you spend, such as rent, utilities, insurance, groceries, and entertainment. The difference between your income and expenses is your cash flow, which represents your financial performance.
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Why Do You Need a Personal Financial Statement?
A personal financial statement can help you in many ways, such as:
Tracking your financial progress: By comparing your personal financial statements over time, you can see how your net worth and cash flow change. This can help you evaluate your financial health, identify your strengths and weaknesses, and measure your progress towards your goals.
Budgeting and saving: By analyzing your income and expenses, you can create a realistic budget that suits your needs and preferences. You can also identify areas where you can save money, reduce debt, and increase your income.
Investing and planning: By knowing your net worth and cash flow, you can make informed decisions about your investments and financial plans. You can choose the best asset allocation, risk level, and time horizon for your goals. You can also plan for your retirement, education, and other major life events.
Applying for credit: When you apply for a loan, a mortgage, or a credit card, lenders may ask you for a personal financial statement. This helps them assess your creditworthiness and repayment ability. A personal financial statement can show them that you have enough assets, income, and cash flow to meet your obligations.
How to Create a Personal Financial Statement?
Creating a personal financial statement is not difficult, but it requires some time and effort. You will need to gather information about your assets, liabilities, income, and expenses, and organize them in a clear and concise format. You can use a spreadsheet, a software, or a template to create your personal financial statement. Here are some steps to follow:
List your assets: Start by listing all your assets, such as cash, bank accounts, investments, retirement accounts, real estate, and personal property. You can use the current market value or the estimated value of your assets. You can also categorize your assets into liquid (easy to convert to cash) and non-liquid (hard to convert to cash) assets.
List your liabilities: Next, list all your liabilities, such as credit cards, student loans, mortgages, car loans, and taxes. You can use the current balance or the outstanding amount of your liabilities. You can also categorize your liabilities into short-term (due within a year) and long-term (due after a year) liabilities.
Calculate your net worth: Subtract your total liabilities from your total assets to get your net worth. This is the bottom line of your balance sheet. A positive net worth means that you have more assets than liabilities. A negative net worth means that you have more liabilities than assets.
List your income: Then, list all your income sources, such as salaries, bonuses, commissions, dividends, and interest. You can use the gross or the net amount of your income. You can also categorize your income into regular (fixed and predictable) and irregular (variable and unpredictable) income.
List your expenses: Finally, list all your expenses, such as rent, utilities, insurance, groceries, and entertainment. You can use the actual or the average amount of your expenses. You can also categorize your expenses into fixed (same every month) and variable (change every month) expenses.
Calculate your cash flow: Subtract your total expenses from your total income to get your cash flow. This is the bottom line of your income statement. A positive cash flow means that you have more income than expenses. A negative cash flow means that you have more expenses than income.
Conclusion
A personal financial statement is a document that summarizes your financial situation at a given point in time. It shows your assets, liabilities, income, and expenses, and helps you calculate your net worth and cash flow. A personal financial statement can help you track your financial progress, budget and save, invest and plan, and apply for credit. You can create your own personal financial statement by following some simple steps and using a spreadsheet, a software, or a template.
