By keeping track of your finances, you can create a secure and fulfilling future. This is where your personal financial statement comes in. At its core, a personal financial statement offers an overview of your financial situation at any given time. It can help you succeed in various areas of your life.
Why do you need a personal financial statement
There are several reasons why you might want to create a personal financial statement. This can help you if you want:
- Take a loan.
- Apply for financial assistance.
- Make a guarantee.
- Develop plans for retirement, estate, college savings, or other financial plans.
- I will lease a commercial office or other types of business space.
- Develop strategies to reduce the tax burden.
- Run for government office.
- Keep track of your credit.
Ideally, your personal financial statement should show that you have positive net worth and that your assets exceed your liabilities. This can allow you to position yourself as a responsible borrower and a person who knows how to manage your money well. It can also prove that you are thriving with your finances.
How a personal financial statement can change your money habits
A personal financial statement can play an important role in how you think about and manage your money. Here’s why: When you see your net worth, you will realize that many of your past and future actions affect this figure. It informs you if you are on track to achieve your financial goals. For example, a high positive net worth could mean you are closer to your dream:
- Buying a dream home or renting a property.
- Retire early.
- Work part-time instead of full-time so you can spend more time with your family.
- Donate more money to a cause or organization that you value.
- Funding your child’s college.
Low or negative net worth can be a wake-up call for you. Perhaps this is exactly what you need to change your behavior and be more careful with how you spend your money. You may have a better chance of getting out of debt, finding a part-time job, and sticking to a budget if you’re not happy with that number.
What is included in a personal financial statement
The three main components of your personal financial statement are:
Balance
Your balance sheet is an overview of your personal wealth and lists all of your assets and liabilities. Assets can include your home, car, savings accounts, and investment accounts. However, liabilities can include a mortgage, a car, student loans, and credit card balances. Your balance sheet will show the difference between the total value of your assets and the total amount of your liabilities owed. This is a great representation of your net worth.
Income statement
Your income statement will consist of your salary, bonuses and commissions. If you have other income from interest, side jobs, or dividends, you will also include this information. Your income statement will also show your premiums, income taxes and any other possible cash outflows. With the income statement, you can determine if you are spending more than you earn and what you can do to improve the way you spend your money.
Cash flow
The cash flow statement shows what you are spending your money on. It breaks down your money into three main categories: fixed, non-discretionary spending, variable, non-discretionary spending, and discretionary spending, or fun money. It removes the lack of information from the balance sheet and income statement. You can use the cash flow statement to find out if you are on the right track to amassing wealth and achieving your goals.
What to exclude from personal financial statements
Now that you know what is included in personal financial statements, let’s discuss what should be excluded. Your personal financial statements will not contain any business-related assets or liabilities. The only exception is a personal loan for your business or any other instrument for which you are directly responsible.
Your personal financial statements should not include anything that you rent or personal items such as household items or furniture, as their value is rarely high enough to be considered an asset.
How often should personal financial statements be updated?
After you write your personal financial statement for the first time, your job is not over yet. Since your finances are likely to change regularly, your personal financial records require frequent updates. It is very important to review and modify your statements every month or every two months. This way, you will always be aware of where you are with your finances, and will be able to adjust your spending and saving habits if necessary.
Personal financial statement and business financial statement
The financial statements of an enterprise usually consist of a profit and loss statement and a balance sheet. As stated, personal financial statements include a balance sheet, income statement, and cash flow statement.
With a financial statement, you can start or grow your business and get small business loans to help you with that. However, personal financial statements focus on your personal life and can help you achieve your personal financial goals, such as buying a house, retiring, or sending your kids to college.
Ways to increase your capital
Your net worth is essentially the value of your assets versus your liabilities. You can have a lot of assets and a lot of liabilities, which means you don’t have a high net worth. On the other hand, you may have minimal assets but no liabilities and a solid net worth.
So what’s the ideal net worth? It depends on your age, lifestyle and comfort level. There is no exact figure that everyone agrees on. However, you can use a formula developed by Thomas Stanley and William Danko, authors of The Millionaire Next Door, to understand where your net worth is. Formula: Net Worth = AgeXPretax Income / 10. If your pretax income is $ 60,000 and you are 35, for example, your ideal net worth would be $ 210,000 using this formula.
Of course, this is just one way to measure your net worth, and it doesn’t necessarily mean that you are struggling with your finances if your income is below the $ 210,000 mark. It’s all about what type of net worth you feel comfortable with.
If your personal financial statements prove that your net worth is negative or lower than you would like, don’t worry. There are many ways to achieve a positive or higher score. Here are some suggestions.
- Cost reduction: The less money you spend, the more you can spend on savings and investments. Take a look at your budget and figure out where you can cut or eliminate costs. For example, if you rarely use your gym membership, cancel it. If you tend to spend money on dining out, prepare more meals at home. Remember that even a few dollars here and there can accumulate and increase your net worth in the long run.
- Look for new sources of income: If your 8 to 5 job doesn’t pay enough, don’t be afraid to make money elsewhere. Depending on your schedule, preferences and interests, you can take a second job or work as a freelancer. Or perhaps you have a lot of products that you no longer need or no longer need and you can sell them on Craigslist or the Facebook Marketplace.
- To buy a house: If you are currently renting a house, saving on a house might be a good option. Mortgage payments can allow you to increase your net worth, which can increase your net worth. If you do apply for home ownership, make sure you choose a home with an average or lesser opportunity. Otherwise, it can turn into a curb rather than a tool for increasing wealth.
- Create an emergency fund: Unfortunately, life does happen and your car might break down or you might need a roof replacement when you least expect it. In such situations, it is useful to have a reserve fund. With a contingency fund, you can cover these contingencies and avoid debt. Most financial experts recommend saving three to six months in an emergency fund.
- Get out of debt: While easier said than done, do your best to reduce or pay off your debt. This includes your student loans, mortgage, credit card debt, car debt, and other places where you make monthly payments.
- Invest: The sooner you start investing, the better. If you have a reserve fund, make your money work for you through investing. You may want to consider some investment vehicles including 401 (k), Roth IRA, Traditional IRA, and 529.
- Insure: Insurance can protect you financially when and if the situation gets dire. Life insurance, car insurance, and health insurance are important investments that can protect your (and your family’s) financial future.
How to prepare personal financial statements
If you want to prepare personal financial statements, you have two options. You can go the DIY route and do them yourself. Luckily, there are many free and paid templates available to help you along the way.
Another option is to consult a financial advisor or hire a financial coach to help you. They can provide you with the expert guidance you need to ensure the completeness and accuracy of your personal financial statements. Even if you create your own reports, a financial advisor can review them and give you the confidence to know that they are in good shape.
A financial advisor can also help you increase your net worth. By learning more about your particular situation, they will be able to provide appropriate guidance and guide you towards a healthier and happier financial future.
This article originally appeared on Your Money Geek and has been republished with permission.