Personal Financial Statements

Evaluate your personal financial statements to gauge your financial health. When evaluating the financial health of a company, bankers and investors rely on three types of financial statements:

  • An income statement, which incorporates income and expenses for a period of time
  • A balance sheet, which shows net worth at a point in time
  • A cash flow statement, which considers not only your household income, but also changes in savings and debt

I’ll show you how to create each of them below.


Income Statement:  Income – Expenses = Net Income

How to create an income statement

Add up your salary or other income

  • Start with your after-tax take-home pay.
  • Add any other sources of income from consulting or part-time work and rental or investment income (all on an after-tax basis).
  • Add your partner’s after-tax take-home pay as well as any other sources of income.

Subtract your expenses or obligations

  • The main recurring obligations are usually associated with your home and include your mortgage or rent; homeowners association, or HOA, fees; and real estate taxes.
  • Other fixed recurring obligations are utilities—cable, phone, cell, electric, gas, and water bills—car and student loan payments, gym memberships, and parking.
  • Other expenses vary or are variable such as groceries, clothing, leisure activities, children’s activities (sports, music lessons, classes, camps), donations, and other miscellaneous expenses.

Your income minus your expenses equals your net income.

What you can learn from your income statement

To increase your net income, you can either earn more than you currently do—ask for a raise, work more hours, take on additional part-time work.  Or reduce your current expenses. Adjusting your expenses is often the easier way to increase your net income.  Tracking all your expenses for a period of time can help you identify ways to increase net income. Look closely at what you spend money on and how much you spend over the course of, say, a month, which will give you a very good idea of where your money is going.

Analyzing your income statement helps you to be better prepared for unexpected outflows and inflows.  Having a cash reserve is essential if you want to be prepared for unexpected situations. An unexpected event could be positive – a new job that requires buying a car, a new addition to the family that requires buying a bigger car.


Balance Sheet:  Assets – Liabilities = Net Worth

How to prepare a Balance Sheet

Determine your Assets

Assets are the first category on a personal balance sheet. Different categories of assets are called asset classes.

  • Investable assets include:  cash and money market funds, US stocks, US bonds (corporate, or issued by companies; municipal, or issued by state or local governments; and federal, or issued by the US government), international stocks, international bonds, commodities, currencies
  • Other assets include:  your home, a vacation home or investment property, car(s) that you own, other valuable items such as jewelry, antiques, or art

Determine your Liabilities

Liabilities, or debts, are the second category on a personal balance sheet. As with assets, there are many types of liabilities.

SECURED DEBTS  Some debts, or loans, are secured, or backed by collateral.

  • The most common form of a secured loan is a mortgage.  With a mortgage, your home is the security, or collateral.  If the loan was taken out when you purchase a home, it is called a purchase money mortgage.
  • Another type of secured debt is a home equity loan or line of credit. With this kind of debt, the equity in the home is the security or collateral.  If you purchase a home, put 20 percent down, and finance your home with a mortgage for the remaining 80 percent, the 20 percent that you put down is your home equity. Over time, the value of a home varies.  As the value of your home varies over time, so does your amount of home equity.  A home equity loan is considered a type of second mortgage.  The mortgage on your home is considered a first mortgage. With a second mortgage, the first mortgage lender has priority over the second mortgage lender in the case of default.
  • Car loans and leases are secured loans.  The monthly payment should appear as an expense on your income statement.  The total loan amount or lease obligation should be included on your personal balance sheet as a liability, or debt.

UNSECURED LOANS. These are debts not backed by collateral.

  • Credit cards are a line of credit, like a HELOC, because the amount outstanding varies.
  • Student loans are also a type of unsecured debt.  Public student loans are provided by the federal government, whereas private student loans are offered by banks, credit unions, or schools. Student loans are usually not discharged, or forgiven, in a bankruptcy.

Calculate your Net Worth

Net worth is the difference between your total assets and your total liabilities. A balance sheet by definition must balance.

  • If the total value of your assets is greater than the total value of your liabilities, your net worth is positive.
  • If the total value of your liabilities is greater than the total value of your assets, your net worth is negative.

What you can learn from your personal balance sheet

A personal balance sheet will help you understand your net worth and, more important, what causes your net worth to fluctuate.

Always remember the formula: Assets minus liabilities equals net worth. Your net worth does not depend only on what you earn (income) or on what you have (assets); it also depends on whether you spend more or less than you earn (savings and debt).


Cash Flow: Income – Consumption = Net Savings

Determining your Cash Flow

Unlike the income statement and balance sheet, cash flow takes into account changes in your savings and your debt.  You either consume or you save the money that you earn. The difference between income and consumption is your net savings.

If you increase savings or reduce debt, then net savings will increase.  If you reduce savings or increase debt, then net savings will decrease.

Regularly evaluating your cash flow relative to your income motivates you to factor in saving money and paying down debt. Mortgages, student loan, and car loans help you finance large expenditures by allowing you to pay for them over time, but how you handle these and other debts has a significant impact on your net worth.  Along with saving for retirement and investing wisely, prudent management of your debts should be a priority.

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