Your Personal Financial Statements
Personal financial statements are the roadmap that guides us from where we are today, to where we want to be tomorrow. They also provide fixed points of reference from which we can measure our progress over time.
Personal Financial Statements
There are two basic personal financial statements that everyone should prepare, or have a financial advisor prepare, at least once each year; the cash flow statement and the balance sheet.
This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control — you know where you are going financially. It helps you to make wise decisions about financial matters.
Cash Flow Statement
“Cash Flow” is how you spend your money. A cash flow statement is an ongoing financial document which tracks sources of income, uses of income, and the difference between the two (surplus funds which should be invested towards future financial objectives.)
If you keep a budget, you are, in essence, keeping a running cash flow statement. By tracking your cash flow on a monthly basis you will be better prepared to meet your financial needs:
- short term expenses – your day to day expenses and standard of living items such as food, transportation, childcare, etc.
- recurring expenses – periodic payments for items such as periodic insurance premiums, tax payments, medical and dental expenses, etc.
- financial emergencies – an emergency fund of three to six months salary will provide cash for emergencies instead of going into debt.
- intermediate and long term goals – systematic planning and saving will help you meet the financial objectives that others cannot.
Your balance sheet is a snapshot of your personal net worth.
Total Assets: A list of current estimated value of your assets might include the following: cash in banks and money market accounts, cash surrender value of life insurance policies, IRA & Keogh accounts, pension and 401(k) accounts, real estate, and personal property. Add them up and you’ll have a figure that represents your Total Assets at the moment.
Total Liabilities: Next, make a list of your liabilities, which might include the following: mortgage, bank loans, car loans, charge accounts, taxes owed, college loans, etc. Add these up and you’ll have a list of your total liabilities. Hopefully, it’s less than your assets!
Your Net Worth: Your personal net worth is the difference between your total assets and your total liabilities.
As the control you gain through cash flow management turns into increased savings, your success is reflected in an increasing net worth. The process of preparing personal financial statements will bring you closer to controlling your personal finances and accumulating sufficient assets to meet your objectives.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
Article from CalcXML.com