Do I Need a Personal Financial Statement?

Every few weeks, there comes that special day. You go to your mailbox, pull out the contents inside, and find an envelope from your bank. Inside is your bank and/or credit card statement. When you open it, you will have one of two reactions to the amount. Either “Sounds about right” or “I spent that much? Really?” The latter reaction is more common than you would think. Month after month, many people will look at their bank and credit card statements and the amount will surprise them. Is there a way to avoid this issue? As a matter of fact, there is. One simple method of properly accounting for income and expenses is to have a ‘personal financial statement’.

Similar to the ones that corporations typically use, financial statements provide you with a rough idea of your financial condition. What’s more, they can offer assistance in helping with budget planning. Furthermore, a personal financial statement is a crucial document that you will likely need as part of the documents for a business loan proposal.

This article will explain what a personal financial statement is and why it’s useful. With this information, you can determine if a personal financial statement is what you need.

What is it?

A ‘personal financial statement’ is a document or spreadsheet that details someone’s financial position at a specific point in time. Oftentimes, a personal financial statement will include general information about the individual. This will typically include their name and address. Moreover, the statement will provide a breakdown of total assets and liabilities. The statement is quite useful for keeping track of both goals and wealth. It is also usually a requirement for when you are applying for credit.

The preparation of a financial statement can be for either an entire business or an individual. The statement displays the overall financial health of the entity whose name is in the statement. It is not uncommon to refer to an individual’s financial statement as a personal financial statement. On top of that, it is a comparatively simpler version of the corporate statements.

A lender will almost always ask for a personal financial statement. This is especially the case if you find yourself presenting a business plan or business loan request to them. Most of the time, you will need to provide a personal guarantee for a portion of the loan. Alternatively, you may have to pledge some of your personal assets in order to ensure the loan. It is not out of the ordinary to refer to this as a ‘collateral loan’. 

The personal financial statement is a requirement for the lender. With it, they can see if you possess enough assets, as well as check what kinds of assets you have. For instance, let’s say you are pledging investments, like an IRA or 401k). In this case, the bank will need to know both the amount of the investment and where it’s being kept.

Understanding the mechanics

An individual’s financial statement will show what their current net worth is. Basically, it highlights the assets minus any liabilities. Net worth is essentially a reflection of what an individual will have in cash if they sell all their assets. Moreover, if they manage to pay off all their debts.

Suppose that the liabilities turn out to be greater than the assets on a personal financial statement. In this particular case, the individual will have a negative net worth. Now, if the individual has more assets than they do liabilities, then they actually have a positive net worth.

Oftentimes, people use personal financial statements whenever they are applying for credit, with examples including a loan or a mortgage. The financial statement gives credit officers the ability to gain perspective into the applicant’s financial situation. They do this so that they can make a knowledgeable credit decision. There are plenty of cases wherein the individual or couple may need to provide a personal guarantee for part of the loan. Alternatively, they may have to pledge a portion of the personal assets as collateral to fully ensure the loan.

By comparing personal financial statements over a period of time, an individual tracks how their financial health is improving. Likewise, they can see if – and how – it is deteriorating.

The two types

There are two different types of personal financial statements:

  1. The personal cash flow statement
  2. The personal balance sheet

1 – Personal Cash Flow Statement

A personal cash flow statement is what measures your cash inflows and outflows. By doing this, it will be able to show you your net cash flow for a specific time period. For the most part, cash inflows include the following components:

  • Salaries
  • Interest that derives from savings accounts
  • The dividends from investments
  • Capital gains coming from the sale of financial securities such as stocks and bonds

In addition, cash inflow can often include money that one receives from the sale of assets. Such assets include houses or cars. In essence, your cash inflow largely consists of anything that could potentially bring money in.

Cash outflow is indicative of all expenses, regardless of whatever size they are. Cash outflows will frequently include these specific types of costs:

  • Payments for rent or mortgage
  • Utility bills
  • Groceries
  • Gas
  • Forms of entertainment like books, movie tickets, and meals from restaurants

So, what’s the purpose of determining your cash inflows and outflows? Really, it all so that you can figure out your net cash flow. Put simply, your net cash flow is the outcome of subtracting your outflow from your inflow. Net cash flow of the positive variety means that you are earning more than you are spending. Moreover, it means that you have some money remaining from that particular period. A negative net cash flow, on the other hand, shows that you are spending more than you are bringing in.

personal financial statement

2 – Personal Balance Sheet

A balance sheet is the second type of personal financial statement. A personal balance sheet gives you a basic idea of what your wealth is at a specific period in time. It is a comprehensive summary of your assets, your liabilities, and your net worth. In other words, it summarizes what you own, what you owe, and your assets minus the liabilities.

Your assets are your ownership of items like a home or a car, and that also includes your investments. Ultimately, you can classify them into three distinct categories:

  1. Liquid Assets: These assets are what you own that have liquidity so that you can easily sell or turn into cash, and all without losing value.
  2. Large Assets: These assets include such things as houses, cars, boats, furniture, and even artwork. Whenever you are creating a personal balance sheet, remember to use the market value of these particular items. If it proves to be too difficult to find a market value, then use recent sales prices of similar items.
  3. Investments: Investments typically include bonds, stocks, certificates of deposits (CDs), mutual funds, and real estate. It would be smart for you to also record investments at their current market values.

Your liabilities are amounts that you owe to others. A good example would be having a loan on your home or car. Another example would be that you might owe money on credit cards. 

Your net worth is the total difference between your assets and your liabilities. Let’s imagine that you have a house and a car possessing a value of $100,000. Moreover, you have a mortgage and car loan that’s worth $75,000. The difference between the two is $25,000, which is what your net worth is. Net worth for an individual is actually similar to the owner’s equity for a business.

How to prepare it

So, now we know what a personal financial statement is and what it entails. The question that remains is how do we create one?

To begin preparations of the statement, you first need to gather information about assets and liabilities. To reiterate an earlier point, the personal financial statement shows assets and liabilities and net worth at a specific period. Because of this, you need to prepare the document with the most recent information available. Your lender is aware that some of this information goes through constant changes as you make your personal financial transactions. Furthermore, investment values will frequently change over time.

Do not worry if you are unsure of the value of assets. All you can do in this case is do your best to determine a reasonable figure. If the lender wants the asset in order to get a guarantee on your business loan, they will conduct an appraisal. 

As part of your preparation for presenting your business plan, there is one other crucial thing you need to do. You should run a complete credit report on yourself because the lender will definitely do this themselves. What this means is that you are getting not just the FICO score, but also a report showing details.

Upon entering all the information on assets and liabilities, the last thing you will need to do is calculate your net worth. As you may recall, your net worth is the overall difference between your assets and your liability. If you have a negative net worth (i.e. you owe more than you own), leave it be. Do not try to alter the document by simply eliminating liabilities or over-estimating assets. All you can do is let it be what it is.

Important thing to remember

This statement is a general document that lists what it is you own and what it is you owe. However, a lender will also require documentation that illustrates both ownership and liabilities. Let’s use a home mortgage for example. If you have one, the lender will probably want an appraisal on the home. They will also want a statement that shows the balance that you still owe on the mortgage. 

If you find yourself in a position where you will need to prepare a personal financial statement, make sure you have the supporting records readily available to share with the lender. Doing so will make the loan process a lot easier, as well as faster. 

Last but not least, remember to be honest, thorough, and accurate when preparing and eventually presenting your personal financial statement. According to the Small Business Administration document:

Knowingly making a false statement on this form is a violation of federal law…”

What’s more, making false claims to the bank regarding your personal financial situation can have disastrous consequences.

So, do I need one?

To answer this question, you need to check your cash flow. If it is currently negative or you want to increase positive net cash flow, there is only one way to approach that. You must assess your spending habits and adjust them accordingly if necessary. Personal financial statements can help you in becoming more aware of your spending habits and net worth. By using it, you will be on the right track to achieving solid financial security.

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