An Explanation Of A Personal Financial Statement
A personal financial statement provides a visual representation of your assets and obligations. It provides you with a current picture of your wealth and aids in your evaluation of your financial condition. Lenders may need a personal financial statement if you’re looking for a loan, even though it’s advantageous for your own financial development.
A spreadsheet or document called a personal financial statement shows your net worth, which is the sum of your assets less your liabilities. You can either establish one on your own or use a financial advisor’s assistance.
Discover the workings of personal financial statements and why they’re crucial for assessing the general soundness of your personal or corporate finances.
Examples and Definitions of Personal Financial Statements
A personal financial statement provides a visual representation of your assets and obligations. It provides you with a current picture of your wealth and aids in your evaluation of your financial condition. Lenders may need a personal financial statement if you’re looking for a loan, even though it’s advantageous for your own financial development.
What exactly are assets and liabilities, though? Your assets are all things you can quickly turn into money, such as:
– money in banks
– retirement savings
– investment kitty
– actual estate
Personal belongings having high value, such as collections of priceless artwork, coins, antiques, and jewels
Your whole debt is referred to as your obligations. They include:
– Mortgages
– education loans
– Charge-card debt
– financing for cars and boats
– loans for which you co-sign
– owes taxes
– Medical bills
Your personal financial statement will show a positive net worth if the total value of your assets exceeds the total value of your obligations. This demonstrates to lenders that you may be a reliable borrower and shows that you are accumulating wealth.
However, if your liabilities outweigh your assets, your net worth is negative. This indicates to lenders that you might be living paycheck to paycheck or spending more than you make, making you a high-risk borrower.
Let’s say your assets are worth $200,000. Your home, a bank account, and a retirement account are examples of this. Let’s imagine you have debts of $130,000. Your mortgage, some student loans, and credit card debt are all included in this. Your net worth is $70,000 in this scenario.
What is the Process of a Personal Financial Statement?
Your net worth, not your income, is what determines your level of wealth. The value of a personal financial statement is in its ability to demonstrate whether your net worth is increasing or decreasing over time. It clarifies your complete financial situation so you can determine whether you’re getting closer to or further away from your objectives.
Consider the scenario when your financial objective is to retire early. You’ve officially paid off all of your debt (apart from your mortgage), but you’re unsure of how far you still have to go before retiring. You make the decision to make a personal financial statement to assess your situation.
Using the aforementioned example as a model, the format for your personal financial statement is provided below.
List all of your assets in Step 1
Most items are clearly valued in money (i.e., you can look in your bank account and see what your balance is). However, some assets, like your automobile, house, or art collection, might need to be appraised first.
It’s crucial to be as exact as you can when preparing a personal financial statement for a lender (and seek an assessment if you’re unsure of the value). However, if it’s only for your own records, a best guess would be acceptable. This might resemble:
$150,000 in your 401(k) and $600,000 in your home (k)
Your investment account has $125,000.
$40k in your savings and banking accounts
You have $30,00 in a regular IRA.
$5k for your automobile
Assets totaling $950,000.
Step 2: List every debt you have
Your obligations are your debts. The only loan indicated here is your mortgage because, in this example, we’ve said you’ve paid off all of your debts except for that one.
Your mortgage is for $300,000.
Liabilities totaling $30,000
Step 3: To calculate your net worth, subtract the two numbers.
In this scenario, your total net worth is $650,000 after deducting your liabilities from your assets.
Let’s say you are aware that you need $1.2 million to achieve financial independence and take early retirement. You would see on your personal financial statement that you are $550,000 short of your objective. The following month, you might update it once more to monitor your progress and make any necessary adjustments to your spending and saving.
Is a Personal Financial Statement Necessary?
Personal financial statements assist people in determining their net worth and understanding the general health of their personal or business finances. When making a credit application for a mortgage, a personal loan, or a business loan, they can also be utilized as a tool. Make a personal financial statement to gain an overview of your financial situation.
Personal financial statements have the major downside of being a frozen image of your financial situation at any one time. You must update it frequently for it to be effective.
The good news is that you can automate your personal financial statement using a variety of online applications. Two well-liked choices are:
You Need a Budget (YNAB) is a personal finance program with effective financial budgeting capabilities that can track your assets and liabilities automatically for you. Your net worth is constantly updated when you make money and pay off debt.
Personal Capital is a popular wealth management application for analyzing your net worth that is commended for assisting you in tracking and optimizing investments as well as identifying opportunities for risk management and diversification. It offers a moving overview of your net worth and links with more than 14,000 financial institutions.
