How to create a personal financial statement

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Man writing personal financial statement

Assessing your financial situation can help you understand your options for creating a strong financial future. To describe your finances, a personal financial statement can provide an overview of your financial situation. With that in mind, here’s how a personal financial statement is used and how to create one for yourself. If you want practical tips for creating a personal financial statement and using it to strategize for your overall financial plan, consider enlisting the help of a trusted financial advisor.

What is a personal financial statement?

A personal financial statement (PFS) is a document or set of documents that describes the financial situation of a person or family. The balance sheet part of a PFS shows your assets and liabilities, or equity. Some people create more detailed personal financial statements, including an income statement or other documents.

A person should create a PFS if he wants to do financial plans. These statements are generally goal-oriented and can help individuals and families achieve their financial goals. They are especially important for young professionals who are just starting their financial journey. If you are new to financial planning, a PFS is a great place to start because it will help you understand your current position as well as your options for moving forward.

A PFS is often used when a person takes out a personal loan. Lenders can ask a potential borrower to create a PFS to understand their debt-to-income ratio, which is a determining factor in the interest rate and how much the borrower will receive.

What to include in your personal financial statement

As mentioned earlier, there are two main sections of any PFS. Here is how each section can be defined:

  • Balance sheet. Your balance sheet will include all of your assets and liabilities. This can include your home, mortgage, car, car loan, taxes, savings accounts, investment accounts, credit card balances, etc. Note that the balance sheet does not include cash flows but includes the total of amounts due or the total value of each account.

  • Income statement. Your income statement will include your salary, bonuses and commissions. It can also include dividends and interest received, concert income or other income. It will also include your income taxes, insurance premiums, and other regular cash outflows. This can include monthly paychecks, budget items like a monthly grocery bill, and other monthly payments that take a toll on your monthly income.

What to exclude from your personal financial statement

"PERSONAL FINANCES"

“PERSONAL FINANCES”

Your PFS is broken down into assets and liabilities. However, there are several things that you will not include in your PFS.

If you own a business or have business related assets and liabilities, they will not be included in your PFS unless you are directly responsible for the costs. An example of this is if you take a personal loan For Your Business.

Also, not all rent is included in a PFS, as the asset does not belong to the individual. An example of this is the rental of office space. However, if you own an office space and rent it out to someone else, the rent you collect is considered income and would be included in a personal financial statement.

Other items that are not included in a PFS include small personal items such as furniture and household items. Although they can represent a significant expense, they are usually not valuable enough to be considered an asset.

Example of personal financial statement

Now that you understand what a personal financial statement is and why it matters, let’s look at an example. Take, for example, Sam who is a young professional and wants to start planning for retirement. She started saving with her business 401 (k) match, bought her first home and has a car that she loves. However, she wants to make sure she is well prepared for retirement, so her financial advisor has asked her to prepare a PSF to understand where she is now.

Sam’s house is worth $ 200,000 and the car she drives is worth $ 30,000. After several years of hard work, she has $ 60,000 in investments and 401 (k) funds and she keeps around $ 5,000 in an emergency fund. Its assets total $ 295,000.

For liabilities, she owes $ 150,000 on her house, $ 10,000 on her car and she has about $ 3,000 in credit card debt. She pays the minimum balance or payment on each liability each month. His liabilities total $ 163,000.

Her assets are worth $ 295,000, but she owes a total of $ 163,000. Therefore, when we subtract his liabilities from his assets, his net value is $ 132,000.

The bottom line

coins, car model, calculator, notepad

coins, car model, calculator, notepad

A personal financial statement is a common starting point for people looking to invest or borrow money. It helps both the individual and the financial institution understand the person’s financial responsibility and what their options are for the future.

If you need help finding a financial advisor, try our financial advisor matching tool. A financial advisor can help you make informed decisions about your assets, liabilities, and wealth building.

Tips for preparing a personal financial statement

  • Consider talking to a financial advisor about creating a personal financial statement. Finding the right financial advisor for your needs doesn’t have to be difficult. The free tool of SmartAsset can connect you with up to three local financial advisors, and you can choose the one that’s right for you. If you are ready, start now.

  • Part of getting your personal finances in order is being aware of common misconceptions on the subject. Knowing those that appear most frequently will help you to avoid such mistakes. If one of your personal financial goals is stability, be sure to follow the 10 most important steps to this goal.

Photo credit: © iStock.com / utah778, © iStock.com / Ildo Frazao, © iStock.com / sureeporn

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