Personal Financial Statements Benefit and Four Easy Steps to Create Them

For a complete look at your financial situation, you should create a personal balance sheet and a cash flow statement. These reports are known as personal financial statements. A personal financial statement is a document that provides information about an individual’s current financial position and presents a summary of income and spending.

Personal financial statements can help you in these areas:
• Determine what you own and what you owe.
• Measure your progress toward your personal financial goals.
• Track your financial activities.
• Organize information that you can use when you file your tax rebates or tax return or apply for credit.

To evaluate your financial situation, you first need to create a balance sheet. A personal balance sheet, also called a net worth statement, is a financial statement that lists items of value owned, debts owed, and a person’s net worth. Your net worth is the difference between the amount that you own and the debts that you owe. Net worth statement is a measure of your current financial position. To create a personal balance sheet, follow these steps.

Determine Your Assets.

Assets are any items of value that an individual or company owns, including cash, property, personal possessions, and investments. To determine your assets, you need to consider four categories of wealth. Wealth is an abundance of valuable material possessions or resources. The categories include: liquid assets, real estate, personal possessions, and investment assets.

Determine Your Liabilities.

When you prepare a personal balance sheet, you must also record your liabilities, or the debts that you owe in assets and liabilities statement. Suppose that you borrow $200 from someone to buy a new printer for your computer. You would record the printer as an asset, but you would also have to record $200 as a liability on you personal balance sheet.

There are two types of liabilities that you should consider:

Current Liabilities.

Current liabilities are short-term debts that have to be paid within one year. Most medical bills, cash loans, and taxes fall under this heading.

Long-Term Liabilities.

Long-term liabilities are debts that do not have to be fully repaid for at least a year. Car loans, student loans, and mortgage loans are examples of long-term liabilities. Note that the term “liabilities” includes only money that you will owe for longer than a month. For example, a telephone bill does not qualify as a liability.

Calculating Net Worth.

Once you know the amounts of your assets and liabilities, you can do some formula in estimating and calculate net worth. To determine your net worth, subtract your liabilities from your assets; the difference is your net worth.

It is important to understand the meaning of net worth. If the Romano family has a net worth of $62,300, that does not mean they have $62,300 to spend. Much of their wealth may be in stocks, real estate, and personal possessions, which cannot be easily converted to cash. Net worth is only an indication of your general financial situation.

Although you may have a high net worth, you can still have trouble paying your bills. This is especially true when most of your assets are not liquid and you do not have enough cash to meet your expenses. That can happen if you purchase a more expensive car than you can afford or spend all of your savings to buy a house.

If you are unable to pay off debts, you may experience insolvency. Insolvency is a financial state that occurs if liabilities are greater than assets. Suppose that Brad owes $4,000 and that his asset, a ten-year-old car and an old computer, are worth $1,800. Even if Brad sold all his assets and put his whole $1,500 paycheck toward paying his debts, he would still be insolvent.

Evaluate Your Financial Situation.

You can use a balance sheet to track your financial progress. Update your balance sheet, or make a new one, every few months to chart changes over time. Is your net worth increasing? Good! Keep doing what you are doing to make that happen. Is it decreasing or just holding steady? Then you might make changes. As a rule, you can increase your net worth by increasing savings, increasing your investments, reducing your expenses, and/or reducing your debts. By practising good cash flow management, it will enhance your financial situation