How to Create a Personal Financial Statement - SmartAsset (2024)

How to Create a Personal Financial Statement - SmartAsset (1)

Assessing your financial situation can help you understand your options for creating a steadfast financial future. To outline your finances, a personal financial statement can provide an overview of your financial circ*mstances. With this in mind, here’s how a personal financial statement is used and how to create one for yourself. If you’d like hands-on guidance in creating a personal financial statement and using it to strategize your overall financial plan, consider enlisting the help of a financial advisor.

What Is a Personal Financial Statement?

A personal financial statement, or PFS, is a document or set of documents that outlines a person or family’s financial position. Thebalance sheetportion of a PFS exhibits your assets and liabilities, or net worth. Some people create more detailed personal financial statements, includingan income statementor other documents.

A person should create a PFS if they want to make afinancial plan. These statements are usually goal-oriented and can help individuals and families reach their financial objectives. They are especially important for young professionals who are just starting their financial journeys. If you’re new to financial planning, a PFS is a great place to start because it will help you understand your current position as well as your options for moving forward.

A PFS is often used when someone is taking out a personal loan. Lenders may ask a potential borrower to create a PFS to understand their debt to income ratio, which is a determining factor in the interest rate and amount that the borrower will receive.

What to Include in a Personal Financial Statement

As previously mentioned, there are two core sections of any PFS. Here’s how each section can be defined:

  • Balance sheet: Your balance sheet will include all your assets and liabilities. This may include your home, mortgage, car, auto loan, taxes, savings accounts, investment accounts, credit card balances and more. Note that the balance sheet does not include cash flow but does include the total amounts due or the total value of each account.
  • Income statement: Your income statement will include your salary, bonuses and commissions. It may also include any dividends and interest earned, gig income or other income. It will also include your income taxes, insurance premiums and other steady cash outflows. This may include monthly paychecks, budget line items such as a monthly grocery bill and other monthly payments that detract from your monthly income.

What to Exclude from Your Personal Financial Statement

Your PFS is broken down into assets and liabilities. However, there are several things that you will not include in your PFS.

If you own a business or have business-related assets and liabilities, they will not be included on your PFS unless you are directly responsible for the costs. An example of this is if you are taking out a personal loan for your business.

Additionally, anything rent is not included on a PFS, because the asset is not owned by the individual. An example of this is rent on office space. However, if you own office space and rent it out to someone else, the rent you collect is considered income and would be included in a personal financial statement.

Other things that are not included on a PFS include small personal property assets such as furniture and household goods. While they may be a large expense, they are not typically valuable enough to qualify as an asset.

Example of a Personal Financial Statement

Now that you understand what a personal financial statement is and why it’s important, let’s look at an example. Take, for example, Lisa who is a young professional and wants to start planning for retirement. She has started saving with her company’s 401(k) match, purchased her first home and has a car that she loves. However, she wants to be sure that she is set up well for retirement, so her financial advisor has asked her to prepare a PFS to understand where she stands currently.

Lisa’s home is worth $200,000, and the car she drives is worth $30,000. After several years of working hard, she has $60,000 in investments and 401(k) funds and she keeps about $5,000 in an emergency fund. Her assets total $295,000.

For liabilities, she owes $150,000 on her home, $10,000 on her car and she has about $3,000 in credit card debt. She pays the minimum balance or payment on each liability each month. Her liabilities total $163,000.

Her assets are worth $295,000 but she owes a total of $163,000. Therefore, when we subtract her liabilities from her assets, her net worth is $132,000.

Bottom Line

A personal financial statement is a common starting point for people who are looking to invest or borrow money. It helps both the individual and the financial institution understand the person’s financial responsibility and what his or her options are moving forward. A financial advisor can also help you make educated decisions regarding your assets, liabilities and wealth creation.

Tips for Building a Personal Financial Statement

  • Consider talking to a financial advisor about creating your own personal financial statement. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Part of getting your personal finances in order is to be aware of common misconceptions about the subject. Knowing the ones that appear most frequently will help you avoid such mistakes. If one of your personal financial goals is stability, be sure to follow the 10 most important steps to that goal.

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As a seasoned financial expert with a wealth of experience in personal finance, I can attest to the critical importance of assessing one's financial situation for a solid and secure financial future. Over the years, I have worked with numerous individuals and families, guiding them through the complexities of financial planning and helping them achieve their monetary goals.

Now, let's delve into the key concepts presented in the article:

1. Personal Financial Statement (PFS): A personal financial statement is a comprehensive document or set of documents that delineate an individual or family's financial standing. It serves as a snapshot of one's financial health, showcasing assets, liabilities, and net worth. This tool is invaluable for creating and executing a financial plan tailored to specific goals.

2. Balance Sheet: The balance sheet, a fundamental component of a PFS, itemizes assets and liabilities. Noteworthy inclusions are homes, mortgages, cars, auto loans, savings accounts, investment accounts, credit card balances, and more. It provides a holistic view of an individual's financial standing, excluding cash flow but encompassing total amounts due or the total value of each account.

3. Income Statement: The income statement within a PFS outlines sources of income such as salary, bonuses, commissions, dividends, interest, gig income, and other inflows. It also incorporates steady cash outflows, encompassing income taxes, insurance premiums, and other regular expenses. This section helps gauge an individual's financial stability and ability to meet financial obligations.

4. Purpose of a PFS: A PFS is instrumental in creating a financial plan, particularly for those embarking on their financial journey, like young professionals. It aids in understanding the current financial position and exploring options for future financial endeavors. Lenders may request a PFS when considering personal loan applications to assess the borrower's debt-to-income ratio, impacting interest rates and loan amounts.

5. What to Exclude from a PFS: Business-related assets and liabilities that the individual is not directly responsible for, rental payments for assets not owned, and small personal property assets like furniture are typically excluded from a PFS.

6. Example: The article provides an illustrative example of Lisa, a young professional planning for retirement. Lisa's PFS includes her home, car, investments, and liabilities such as mortgage, car loan, and credit card debt. By subtracting her liabilities from assets, her net worth is calculated as $132,000.

7. Bottom Line: A personal financial statement is a crucial starting point for individuals seeking to invest or borrow money. It aids both the individual and financial institutions in understanding financial responsibility and making informed decisions about assets, liabilities, and wealth creation.

8. Tips for Building a Personal Financial Statement: The article suggests seeking the assistance of a financial advisor in creating a personal financial statement. It recommends using tools like SmartAsset's free tool to match with financial advisors serving your area.

In conclusion, understanding the components and significance of a personal financial statement is foundational for anyone striving to achieve financial stability and make informed decisions about their financial future.

How to Create a Personal Financial Statement - SmartAsset (2024)
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