Definition of personal financial statements



What is a personal financial statement?

The term personal financial statement refers to a document or spreadsheet that describes an individual’s financial situation at a particular time. The statement usually includes general information about the person, such as name and address, as well as a breakdown of total assets and liabilities. The statement can help individuals keep track of their financial goals and wealth, and can be used when applying for credit.

Understanding personal financial status

Financial statements can be prepared for businesses or individuals. An individual’s financial statement is called a personal financial statement and is a simpler version of the company’s financial statements. Both are tools that can show the financial health of the subject.

A personal financial statement shows an individual’s net worth (their assets minus their liabilities), which reflects what that person has in cash if they sell all of their assets and pay off all of their debts. If their liabilities are greater than their assets, the financial statement shows negative net worth. If the individual has more assets than liabilities, he ends up with positive net worth.

Keeping an up-to-date personal financial statement allows a person to track the improvement or deterioration in their financial health over time. These can be invaluable tools when consumers want to change their financial situation or apply for credit such as a loan or mortgage. Knowing where they stand financially allows consumers to avoid unnecessary inquiries into their credit reports and the hassle of denied credit applications.

The statement also allows loan officers to easily take into account the applicant’s financial situation in order to make an informed credit decision. In many cases, the person or couple may be required to provide personal collateral for part of the loan or to provide collateral to secure the loan.

Key points to remember

  • A personal financial statement lists all the assets and liabilities of an individual or a couple.
  • An individual’s net worth is determined by subtracting their liabilities from their assets – a positive net worth shows more assets than liabilities.
  • Equity can fluctuate over time as the values ​​of assets and liabilities change.
  • Personal financials are useful for tracking wealth and goals, as well as applying for credit.
  • While they can be included in a personal financial statement, income and expenses are usually listed on a separate sheet called the income statement.

Special considerations

A personal financial statement is broken down into assets and liabilities. Assets include the value of securities and funds held in current or savings accounts, retirement account balances, trading accounts and real estate. Liabilities include all the debts that a person may have, including personal loans, credit cards, student loans, unpaid taxes, and mortgages. Debt held jointly are also included. Married couples can create common personal financial statements by combining their assets and liabilities.

Income and expenses are also included if the statement is used to obtain credit or to show a person’s overall financial situation. This can be tracked on a separate sheet or an addendum, called an income statement. This includes all forms of income and expense, usually expressed as monthly or annual amounts.

The following items are not included in a personal financial statement:

  • Assets and liabilities related to the company: These are excluded, unless the individual is directly and personally responsible. So if someone personally guarantees a loan for their business, such as a co-signature, the loan is included in their personal financial statement.
  • Rented items: Anything that is leased is not included in the personal financial statements because the assets are not owned. It changes if you own the property and rent it out to someone else. In this case, the value of the property is included in your asset list.
  • Personal property: Items such as furniture and household items are generally not included as assets on a personal balance sheet because these items cannot be easily sold to pay off a loan. Personal property of significant value, such as jewelry and antiques, may be included if their value can be verified by appraisal.

Business liabilities are only included in a personal financial statement if an individual provides the creditor with personal security.

Keep in mind. Your credit history and credit history are important considerations when it comes to obtaining new credit, and each lender has different credit requirements. So even if you have positive equity (more assets than liabilities), you may still be denied a loan or credit card if you haven’t paid your past debts on time or if you have too much. inquiries in your file.

Example of personal financial statement

Suppose Henry wants to track his net worth as he heads into retirement. He has paid off his debts, saved money, invested and is getting closer to owning his house. Each year he updates the statement to see the progress he has made.

Here’s how he would break it down. He would list all of his assets: $ 20,000 for a car, $ 200,000 for his house, $ 300,000 in investments and $ 50,000 in cash and the like. He also has high value stamps and artwork valued at $ 20,000 that he can list. Its total assets are therefore $ 590,000. As for liabilities, Henry owes $ 5,000 for the car and $ 50,000 for his house. Although he does all his purchases with a credit card, he pays the balance every month and never carries a balance. Henry co-signed a loan for his daughter and he has $ 10,000 left. Even though it’s not about Henry’s loan, he’s still responsible for it, so it’s included in the statement. Henry’s debts are $ 65,000.

When we subtract his liabilities from his assets, Henry’s net worth is $ 525,000. Although he primarily uses it to track his financial health, Henry can use this information – and the statement as a whole – if he wants to apply for another loan.



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