Personal Financial Statements everyone should prepare.

Personal Financial Statements everyone should prepare.
2021 / 11 / 05

There are two personal financial statements everyone should prepare and update on a regular basis — a personal balance sheet and a cash-flow statement.  These two statements will provide a quick snap-shot of your current financial position and provide a summary of your income and spending.  The purpose of these financial statements is to:

  • Summarize the value of what you own and what you owe
  • Track cash-inflows and cash-outflows by type
  • Identify strengths and weaknesses in your current financial situation
  • Measure progress towards achieving your financial goals

A personal balance sheet summarizes what an individual or a family owns and owes; also known as a net-worth statement.  A balance sheet categorizes your assets (what you own) and subtracts your liabilities (what you owe) to arrive at your net-worth (your wealth).  To prepare a personal balance sheet, on paper or a spreadsheet, make a list of all assets and their estimated value and then below it, list all liabilities and then take the total value of all assets and deduct total liabilities to arrive at net-worth.  A positive net-worth indicates the value of your assets exceeds the value of your liabilities, while a negative net-worth indicates the value of your liabilities exceed the value of your assets.  By preparing a personal balance sheet and updating it at regular intervals, you will be able to determine if your net-worth is increasing or decreasing over time.  A net-worth that is positive or increasing over time can be further improved by increasing savings, reducing expenses and/or paying down debt.  A net-worth that is negative or steadily decreasing over time indicates an individual or household might have more debt than they can effectively service and therefore, options for debt relief should be explored.

A cash-flow statement is a summary of cash received (inflows) and expenses (outflows) for a given period of time such as a month or a year.  A cash-flow statement will summarize total cash received (income/deposits from all sources) for a period, less cash outflows (expenses) for the period to arrive at a cash surplus or deficit.  To prepare a cash-flow statement, on paper or a spreadsheet, record all sources of income/deposits for the month and then deduct a list of all projected expenses for the month, including all living expenses and minimum debt repayments.  Finally, subtract total income/deposits for the month from all projected expenses for the month.  A positive result indicates a cash surplus while a negative result indicates a cash deficit.  When you have a cash surplus, you can allocate the surplus towards achieving financial goals by saving, investing, paying off debt or a combination of all three.  When you have a cash deficit, not only will you lack funds for achieving financial goals, the deficit must be made up by withdrawing from savings, selling assets, or by borrowing more; all of which will reduce your net-worth over time.  Unlike government who has the power of taxation, an individual or family running cash deficits is not sustainable long term.  If income cannot be increased and/or expenses significantly reduced, options for debt relief should be explored.

If you are looking for advice or a second opinion about your debt, it does not cost anything to talk about your options.  At Jaime Johnson & Associates, you will always deal with Jaime, a Licensed Insolvency Trustee.  Together, we will review and discuss all options for debt relief until you are confident you are making an informed decision.