A personal financial statement is a financial report that summarizes an individual’s financial status at a specific point in time. It typically includes information about a person’s assets, liabilities, and net worth. Individuals often use the statement when applying for loans or other forms of credit, as it helps lenders assess the borrower’s ability to repay the debt. Individuals can also track their financial progress and make informed decisions about their financial future. Some key elements to include in a personal financial statement are a list of assets and liabilities and a net worth calculation.
Personal Financial Statement Definition
A personal financial statement is a created document that provides you with a snapshot of your present individual financial standing. It includes a detailed breakdown of your assets and liabilities. The document can be helpful for the moment as you assess your financial standing. But it’s also useful for tracking your personal growth and goals. There are two main elements to a PFS (Personal Financial Statement): an income statement and a balance sheet.
Get a free excel personal financial statement template (PFS).
Net Worth
Have you wanted to create a budget that you could live by? Maybe you’ve just wondered about your financial health. (Yes, that’s a real thing!) Do you have any idea how much your net worth is? If you’re like most people, you may not even have a goal established for your net worth. No matter how you responded to these questions, it may be time to investigate creating a personal financial statement. Having one can help you outline your personal assets and liabilities to help you determine your net worth. But there’s much more to personal financial statements than keeping your bank account healthy.
Why Do You Need a Personal Financial Statement?
Your personal financial statement presents you with your net worth. Net worth is calculated by using the value of all your assets, both financial and non-financial, and subtracting the total value of everything you owe.
Calculate Your Net Worth
Why do you need to know your personal net worth? It is a robust calculation just because it provides you with an overview or a snapshot of your present financial situation. You will have to increase your assets or decrease your liabilities to increase your net worth.
Track Your Net Worth
It is possible to have a negative value for your net worth. This is a sign that it’s time for you to reduce your liabilities. This is not too uncommon. It often occurs with young people who are getting started in their careers. Maybe they owe a lot of student loan debt or just had some very difficult times. No matter where you are on your financial journey, you’ll want to evaluate your personal finances at least annually. The value of assets can change, and their fluctuations can affect your financial standing. Evaluating yearly or any time you have a significant change in your finances can help keep you ahead of the game.
When Will You Use a Personal Financial Statement?
There are many times you will need to use a PFS. It is beneficial if you are making future financial plans. The statement is goal-oriented, and it can be used to help you reach financial objectives. A PFS is an excellent starting point for young people who are just beginning their own personal financial journey. Not only can it help you determine your current financial position, but it can help you find and take advantage of opportunities in the future. It’s useful if you are applying for a loan. It’s common for a lender to ask to see a PFS so they can gauge your debt-to-income ratio. Having assets that are worth more than your liabilities show a positive net worth. The lender may see you as a trustworthy borrower. But if your liabilities end up being more than your assets, you have a negative net worth, and you’ll be seen as a high-risk borrower.
Two Essential Elements in a PFS
The key two elements in a PFS include Assets and Liabilities.
Assets
Assets are basically what puts money back into your hands. Anything you own has monetary value are an asset. Assets include items of value that you could use to turn into cash if needed. These include things like your savings account, stocks, and bonds, real estate, vehicles, land, or jewelry. There are two types of assets; current and long-term. To be considered a current or liquid asset, an item would be easy to turn into cash in a short time, such as stocks. Money in your bank account is a very liquid asset. Something like a baseball card collection is not considered a current asset.
Liabilities
Liabilities take money out of your hands. Liabilities are the obligations you owe to others. They are anything you owe, including credit card balance, mortgage balance on your home, car loans, unpaid taxes, student loans, the money you owe for services, general unpaid bills, and more. Remember that the principal and unpaid interests on loans and mortgages count as liabilities too.
How to Create Your Personal Financial Statement
It can be time-consuming to create a PFS, but it’s worth the effort. To create a personal financial statement, list all your assets. Include everything that makes you money or has the potential to be turned into money.
Key Assets in Your Personal Financial Statements
Some of the items to make sure you include on your listed assets will be:
- Cash: what you have on hand and the balances in checking and savings accounts.
- Retirement Accounts: Include your IRA and a 401K if you have them.
- Significant Assets: These include jewelry, vehicles, real estate, and other bigger assets.
- Real Estate: Personal property that you own should be listed with your assets. Don’t forget to include the type of property, the date of purchase, the original cost, and the current market value.
- Life Insurance: Include your beneficiaries, insurance details, and the face value if you surrendered your policy.
- Debts Owed You: List any debts or payments that others owe you personally.
Key Liabilities in Your Personal Financial Statement
- Mortgage: list the total you owe on your mortgage if applicable.
- Unpaid Taxes: These are back taxes. Only include an estimate for taxes that have been filed.
- Money You Owe: List any personal or student loans you owe.
- Unpaid Accounts: Make an itemized list of your credit card balances and any other unpaid balances. Include the amount you owe and the interest.
- Installment Loans: List auto payments separately and any other payments that are being made in installments. (Don’t include your mortgage, it’s already listed.)
- Contingent Liabilities: List any liabilities you’ve gained through endorsement or co-creation. These include items separate from your personal liabilities. It includes things like legal claims.
- Notes Payable: List any institution or person you owe and include their addresses and the original debt, remaining debt, child support, and the frequency of payments.
Add up your list of assets. Then total your liabilities. Once you have these two totals, subtract your liabilities from your assets. The difference is used to determine your net worth.
What Shouldn’t Be On a PFS
Your personal financial statement is just that – personal. Therefore, there are a few things that should not go on your PFS. Here are a few examples of things that do NOT go on your PFS.
- If you own a business, it has its own set of assets and liabilities. These should not be included on a PFS, unless you are solely and directly responsible for the costs. If you take out a personal loan to pay your business expenses, that would be included on your PFS under liabilities.
- Small personal property assets like household goods and furniture don’t belong on a PFS. Even if they were one of your larger expenses, they are not considered valuable to be an asset.
- Anything you rent shouldn’t be listed as an asset. For example, if you rented out office space, you don’t own the office, so it’s not yours and it’s not an asset. However, if you own some office space and you rent it out for others to use, the collected rent is income and would be included on your income sheet on your personal financial statement.
Final Thoughts on Personal Financial Statements
Creating your personal financial statement takes work and time. There is a lot of information and data to record. But if it’s not all recorded in a structured format, no one, including yourself, will be able to make any sense of it. However, a PFS is a great tool to help you take control of your finances. A PFS is great for helping make financial decisions such as renting, buying, making loan payments, and more. If you need help creating your PFS, check out the Neat Financials software for creating and managing personal financial statements.
