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A personal financial statement can give you the full picture of your financial health in a single document. This snapshot can be very helpful when tracking your goals and planning for the future.
Keep reading to learn why it matters and how to create yours.
How a personal financial statement helps
If you’ve invested in stocks, you may be familiar with financial statements of companies, which are released every year or every quarter.
Their reports typically include a balance sheet, income statement, and other relevant information that give shareholders a good look at the company’s health and growth prospects.
For individuals, financial statements can have the following practical uses:
1. To keep track of your net worth
A personal financial statement helps you see where you currently stand money-wise, as reflected by your net worth.
Without a clear look at what you own and what you owe, you risk overspending, missing potential debt issues, or failing to save and invest.
2. To help assess your creditworthiness
Maintaining your own balance sheet can help you gauge your creditworthiness, or ability to qualify for loans based on your financial standing and credit history.
For big loans like those for a house or car, banks and lenders tend to ask for a list of assets and liabilities, so having a copy ready can save you a lot of time.
3. To see where you are with your goals
When you know your numbers, your progress is easier to measure and so you’ll have a better knowledge of what else you need to do to get or stay on track.
Three steps to build a personal financial statement
This 3-step guide involves separating your finances into 2 main parts. The 1st is a balance sheet that shows your assets, liabilities, and net worth.
The 2nd part is an income statement that reflects your earnings and expenses.
Step 1: Start with what you own
Your balance sheet should include an inventory of your assets, or everything you own that has value. To simplify, you can divide assets into 2 groups: financial assets and real assets.
Financial assets are non-physical items with monetary value, such as bank accounts and financial investments like stocks or pooled funds.
Real assets are tangible items that you can sell and use in the real world, like real estate properties, vehicles, and fine jewelry.
In separate columns next to your list of assets, you can write down what you paid for each item (or its acquisition cost) and what it’s worth today (or its current market value).
Add up the market values of everything to get your total assets.
Step 2: List what you owe
Next, write down your liabilities. These are your debts and financial obligations, like loans, money owed to family or friends, and other forms of credit.
List each debt along with the amount still owed. Add them all up to get your total liabilities. You can then get your net worth by subtracting total liabilities from total assets.
A positive net worth means you own more than you owe, which can be a good sign. A negative number means you owe more than you own, which may be a signal to take action and avoid getting into too much debt.
Step 3: Create an income statement
This tracks your money coming in (income) and your money going out (expenses) over a period, which is usually 1 month.
With an income statement, you can check whether you’re maintaining a balanced budget or if you need to make changes like spending less or saving and investing more.
Fill in the table with the following information:
- Income sources
Include all sources of regular income and indicate how much you get from every month. This covers your salary after taxes and contributions, as well as money from businesses, freelance work or side hustle, rental income, and dividends.
- Expenses
Your monthly expenses can either be fixed or variable. Fixed expenses stay the same each month so it’s easier to account for them, like rent, car payments, and insurance.
Variable expenses change month to month, like groceries, dining out, gas, entertainment, and clothing. You can include the monthly allowance you’ve set for these items.
- Savings and investments
In this category, you can include the amount that you allocate to savings and investments each month.
With an income statement and balance sheet, your financial statement is complete. Remember to review it periodically – ideally every month – to track your progress and keep everything up to date.
You can also create different versions for each year or quarter to see how things change over time.
A simple spreadsheet or even a notebook is enough to get started. You can even find templates online, so you don’t have to start from scratch. The important thing is to begin as soon as you can.
