A personal financial statement outlines an individual’s financial position at a specific point in time. This crucial document or spreadsheet includes basic information about the individual, such as name and address, alongside a detailed breakdown of total assets and liabilities. By utilizing this statement, individuals can effectively monitor their financial goals, overall wealth, and facilitate smoother credit application processes.
Key Takeaways
- A personal financial statement lists all assets and liabilities of an individual or couple.
- An individual’s net worth is determined by subtracting their liabilities from their assets—a positive net worth reflects more assets than liabilities.
- Net worth can fluctuate over time as the values of assets and liabilities change.
- Personal financial statements are beneficial for tracking wealth and goals, as well as applying for credit.
- Income and expenses, although related, are generally placed on a separate sheet called the income statement.
Understanding the Personal Financial Statement
Financial statements can be prepared for either companies or individuals. An individual’s financial statement, commonly known as a personal financial statement, illustrates a simpler version of corporate statements. Both serve as vital tools to present the financial health of the subject.
A personal financial statement illustrates the individual’s net worth (assets minus liabilities), encapsulating the tangible cash value if all assets were liquidated and debts were settled. A negative net worth indicates higher liabilities than assets, while a positive net worth indicates the reverse.
Regular updates to a personal financial statement enable an individual to track their financial journey, effectively supporting decisions to alter financial situations or facilitating credit applications like loans or mortgages. Staying informed on their financial position helps consumers evade unnecessary credit inquiries and the frustrations of declined credit applications.
Credit officers benefit from personal financial statements as they provide clear insight into the applicant’s finances, assisting informed decision-making. Frequently, a personal guarantee or collateral might be requested to secure the loan.
Special Considerations
A personal financial statement is subdivided into assets and liabilities.
Assets
Assets include values of:
- Securities and funds held in checking or savings accounts
- Retirement accounts
- Trading accounts and real estate
Liabilities
Liabilities encompass any debts, including:
- Personal loans
- Credit cards
- Student loans
- Unpaid taxes and mortgages
- Joint-owned debts
Additional Items
Income and expenses can be included on a separate income statement for an overarching financial view, recording all forms of income and expense.
Items Excluded from Personal Financial Statement
- Business-related assets and liabilities: Unless the individual is personally liable for them.
- Rented items: Assets not owned are excluded. Conversely, property owned and rented out to others is included.
- Personal property: Such as furniture and household goods, are typically excluded unless they have significant value (e.g., jewelry and antiques), appraised and verified.
Business liabilities are considered only when personal guarantee is provided. Credit history and credit report significantly influence credit decisions. Even with positive net worth, late payments or excessive inquiries can lead to credit denials.
Example of a Personal Financial Statement
Let’s explore how River can prepare a personal financial statement to track progress towards retirement.
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Assets:
- Car: $20,000
- House: $200,000
- Investments: $300,000
- Cash and cash equivalents: $50,000
- Collectibles (stamps and art): $20,000
- Total Assets: $590,000
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Liabilities:
- Car loan: $5,000
- Mortgage: $50,000
- Loan cosigned for daughter: $10,000
- Total Liabilities: $65,000
Subtracting liabilities from assets, River’s net worth equals $525,000.
River predominantly uses this statement to monitor financial health, while it serves as indispensable documentation for potential credit applications.
Related Terms: income statement, balance sheet, financial statements.
References
- Small Business Administration. “Personal Financial Statement”. Pages 2-3.
- Experian. “What Happens If Your Loan Is Denied?”
