When we talk about financial statements, balance sheet and income statement of companies are what comes to our mind. Financial statement plays a crucial and significant role in understanding the company’s financial situation and stability. Similarly preparing a personal financial statement is equally important and helpful. Personal financial statements provide clarity regarding your current financial standings, and will also help you in projecting your future financial goals and ways to reach there.
Ways to prepare your personal financial statement
You can create your personal financial statements through various ways, such as financial tools like pocketsmith. Banks also provide these services; one such service is the budget and track service offered by Commercial Bank of Dubai. Or you can just go by the traditional way of using an excel spreadsheet or pen and paper.
If the traditional way is what you choose, then there are two statements that you need to prepare (or get it prepared by your financial advisor) in a personal financial statement.
- Personal balance sheet
- A personal cash flow statement
Personal Balance Sheet
A personal balance sheet determines and communicates your financial worth. It contains your total assets (current estimated value of your assets) and total liabilities (what you owe). You can make your own balance sheet or get templates of balance sheet online from various websites such as finanacialplanningdubai.com and such, or by purchasing software such as “balance sheet made simple” from online sites.
An asset is usually anything that you own which has significant financial value. An asset usually consists of liquid money (bank balances, fixed deposits, money market accounts), all investments (this includes any mutual fund investments, insurance policies, company shares, college savings accounts etc), sale value of all the land/homes you own, resale value of all the vehicles you own, personal property value (resale value of jewellery, household items, etc) and other assets. Summation of all the above categories will give you the amount of total asset you possess
A liability is anything that you are expected to give to one or more people or company/group of companies etc. in the form of money. Payment can be made for a good or service against anything that can be classified as an acceptable form of the asset provided the recipient individual/company/organization accepts a settlement of liability in that form. Liability is usually in the form of the remaining mortgage balance, car loans, student loans, any other personal loans, credit card balances. Summing up all these will give you the amount of total liability you owe.
The difference between the two heads above will provide you with your net worth. If your net worth turns out to be low, you need to start decreasing your liabilities. Make sure you keep updating your balance sheet to keep a constant check.
Personal cash flow statement
A personal cash flow statement determines and communicates your net surplus which will be available for future investment or deficit. In other words, a personal cash flow statement will keep track of your income sources, where you spend it and the difference between these two.
Sources of income (cash inflow):
Salary, bonus/tips/commissions, government support, child alimony/support, investment income, dividend income, interest income, capital gains, pension, social security, all of these are a part of, but not limited to the term ‘income sources’ or ‘source of income’. Anything that generates money for you is a source of income.
Expenses (cash outflow):
Mortgage, rent, car payments, insurance premium, alimony/child support, groceries, utilities, medical care, entertainment, dining, maintenance home/automobile, other expenses constitute the expenses. In other words, anything that causes you to pay a certain amount of money can be categorized as an expense.
If your cash flow is a positive number then you can invest the difference to reach your end goal, but if the cash flow difference is in negative then you will need to reassess your spendings; ideally, expenses should be less than income.
Personal cash flow statement can be prepared using the traditional mediums, i.e., pen and paper or excel spreadsheet. There are also tools/software/templates available online to make it easier, some them are The Cash Flow Statements Made Simple PC Software,
Why preparing personal financial statement is important/needed?
It can help you meet your investment goals: if you prepare your personal financial statement and understand your financial health, then you can formulate a better path to reach your goals and also quantify them.
- Preparing a personal financial statement will help you understand the misallocation of resources and how you can properly allocate your assets/resources.
- It can also make you aware of the positive cash flow amount, which can be further utilized as an investment to reach your financial goal.
- It is required to obtain loans/mortgages
- It will be used if in case you decide to open a business and require financing.
- To plan for retirement
This process of preparing a personal financial statement will help you grow financially and increase your probability of reaching your financial goals. Comprehending your financial position can help you take control of it. Keep in mind assets are favorable and liabilities are always unfavorable. Good money management leads to growth in assets; bad management leads to liabilities.