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Personal Financial Statement: Definition, Uses, and Example

What Is a Personal Financial Statement?

The term personal financial statement refers to a document or spreadsheet that outlines an individual's financial position at a given point in time. The statement typically includes general information about the individual, such as name and address, along with a breakdown of total assets and liabilities . The statement can help individuals track their financial goals and wealth, and can be used when they apply for credit .

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 shows more assets than liabilities.
• Net worth can fluctuate over time as the values of assets and liabilities change.
• Personal financial statements are helpful for tracking wealth and goals, as well as applying for credit.
• Although they may be included in a personal financial statement, income and expenses 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 is referred to as a personal financial statement and is a simpler version of corporate statements . Both are tools that can show the financial health of the subject.

A personal financial statement shows the individual's net worth —their assets minus their liabilities—which reflects what that person has in cash if they sell all their assets and pay off all their debts. If their liabilities are greater than their assets, the financial statement indicates a negative net worth. If the individual has more assets than liabilities, they end up with a positive net worth.

Keeping an updated personal financial statement allows an individual to track how their financial health improves or deteriorates over time. These can be invaluable tools when consumers want to change their financial situation or apply for credit such as a loan or a mortgage . Knowing where they stand financially allows consumers to avoid unnecessary inquiries on their credit reports and the hassles of declined credit applications.

The statement allows also credit officers to easily gain perspective into the applicant's financial situation in order to make an informed credit decision. In many cases, the individual or couple may be asked to provide a personal guarantee for part of the loan or they may be required to put up collateral to secure the loan.

Special Considerations

A personal financial statement is broken down into assets and liabilities. Assets include the value of securities and funds held in checking or savings accounts , retirement account balances, trading accounts , and real estate. Liabilities include any debts the individual may have including personal loans, credit cards, student loans, unpaid taxes , and mortgages. Debts that are jointly owned are also included. Married couples may create joint personal financial statements by combining their assets and liabilities.

Income and expenses are also included if the statement is used to attain credit or to show someone's overall financial position. This can be tracked on a separate sheet or an addendum, called the income statement . This includes all forms of income and expenses—typically expressed in the form of monthly or yearly amounts.

The following items are not included in a personal financial statement:

• Business-related assets and liabilities: These are excluded unless the individual is directly and personally responsible. So if someone personally guarantees a loan for their business—similar to cosigning —the loan is included in their personal financial statement.
• Rented items: Anything rented is not included in personal financial statements because the assets aren't owned. This changes if you own the property and rent it out to someone else. In this case, the value of the property is included in your asset list.
• Personal property: Items such as furniture and household goods are typically not included as assets on a personal balance sheet because these items can’t easily be sold to pay off a loan. Personal property with significant value, such as jewelry and antiques, may be included if their value can be verified with an appraisal .

Business liabilities are only included in a personal financial statement if an individual provides the creditor with a personal guarantee.

Keep in mind. Your credit report and credit history are big considerations when it comes to getting new credit and every lender has different requirements for issuing credit. So, even if you have a positive net worth—more assets than liabilities—you may still be refused a loan or credit card if you haven't paid your previous debts on time or have too many inquiries on file.

Example of a Personal Financial Statement

Let's assume that River wants to track their net worth as they move toward retirement . They have been paying off debts, saving money, investing , and are getting closer to owning their home. Each year, they update the statement to see the progress they have made.

Here's how they would break it down. They would list all their assets—$20,000 for a car, $200,000 for their house, $300,000 in investments, and $50,000 in cash and equivalents . They also own some highly collectible stamps and art valued at $20,000 that they can list. Their total assets are, therefore, $590,000. As for liabilities, River owes $5,000 on the car and $50,000 for their house. Although River makes all of their purchases with a credit card, they pay the balance off each month and never carry a balance. River cosigned a loan for their daughter and $10,000 remains on that. Even though it is not River's loan, they are still responsible, so it is included in the statement. River's liabilities are $65,000.

When we subtract their liabilities from their assets, River's net worth is $525,000. Although they use it mainly to track their financial health, River can use this information—and the statement as a whole—if they want to apply for any other credit.

Small Business Administration. “ Personal Financial Statement .” Pages 2-3.

Experian. “ What Happens If Your Loan Is Denied? ”

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How to Create your Own Personal Financial Statement—and Why You Want One

A personal financial statement gives you a clear idea of how you’re doing financially at any point in time. it's also a great tool to bring with you when applying for a loan..

Before you start any journey, you need to know where you are. That’s exactly what a Personal Financial Statement is for—it’s a snapshot of your personal financial position at a specific point in time. A step up from a spending plan, it lists your assets (what you own), your liabilities (what you owe) and your net worth (your liabilities subtracted from your assets). Understanding where you are now means you can set future goals and create a plan to get you there. A personal financial statement can also be a great tool when you’re ready to apply for a loan or mortgage.

First, list all of your assets which include (but aren’t limited to):

Your cash: The total balance of your checking accounts, savings accounts and any cash on hand.

Your retirement accounts: Include your 401k and your IRA, if you have them.

Value of significant assets: These are your bigger assets and usually include items like a car, real estate, life insurance policies, material property, and jewelry. Some item values may be variable, so be sure to check in and update those numbers from time to time.

Real Estate: Any piece of real estate or personal property that you own. Specify what type of property it is, the date it was purchased, and its original cost and present market value. You should also include the name and address of each mortgage holder (even if it’s you), each mortgage account number, the balance and status of each mortgage, as well as the amount of money paid against each mortgage every month or year.

Life insurance: List your beneficiaries, insurance company details, and the face amount and cash surrender value of each policy.

Accounts and notes receivable: "They Owe You’s"—any debts or payments that are personally owed to you.

Then, add up the liabilities:

Unpaid taxes: Back taxes, not estimates.

Total real estate mortgage owed, if applicable.

Money you owe institutions: List money you owe to any institution that loaned money to you, such as personal or student loans.

All unpaid accounts: Create an itemized list of open credit card balances or other unpaid accounts. Be sure to list the amount owed and interest impacts.

Unpaid installment accounts: This item will have two lists: one for auto payments and one for any other payments made in installments—but NOT mortgage payments as they should be listed separately.

Life insurance loan, if you have one.

Contingent liabilities: These are kept separate from normal liabilities because they are, in a sense, not your sole responsibility. List any liabilities you have accrued through endorsement or co-creation of, say, a business, as well as any other special debts such as legal claims or responsibilities and income tax provisions on the federal level.

Notes payable to banks and others: List the names and addresses of people and institutions to whom you owe money (the “Noteholders”), as well as original debts, current remaining debts, child support, and the amounts and frequencies of payment installments.

The total sum of all liabilities: Remember, this number must be accurate because you’ll subtract it from your assets to calculate your net worth.

Final math time: Your Assets - Your Liabilities = Your Net Worth

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How to Create a Personal Financial Statement + [Free Template and Sample]

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Do you want to create a personal financial statement, but aren’t sure where to start?

According to Mint.com , over 65% of people have no clue how they spent money last month. So, you can probably be pretty sure even less know how their personal finance situation.

With rising costs for essentials like housing and education due to inflation, there is no better time to get an accurate picture of your current situation today.

If you’re wondering how your finances measure up, a Personal Financial Statement can be an invaluable tool in helping you understand where you stand financially and prepare for changes ahead.

This article will walk through creating a sample personal financial statement template with examples of what this document might look like based on your situation.

A personal financial statement isn’t just for your loan applications anymore, it’s an opportunity for transparency in your finances too!

What is a personal financial statement?

A personal financial statement is a document that summarizes your assets, liabilities, and net worth. A PFS can help you understand your financial health so you can make informed decisions about your money.

A personal financial statement template will typically include three sections:

• Assets: This section will list all of the money and property you own.
• Liabilities: This section will list all of the money you owe.
• Net Worth: This section will calculate your net worth by subtracting your total liabilities from your total assets.

Your personal financial statement should be updated on a regular basis, typically once a year. This will help you track your progress and make sure you’re on track to reach your financial goals.

What are the benefits of creating a personal financial statement?

There are many great benefits of a personal financial statement.

By creating a personal financial statement, you can see at a glance how much money you have coming in, going out, and what your net worth is. This information can be extremely helpful in making financial decisions and setting goals.

Benefit #1 – Understand Your Financial Situation

This is why you must spend the extra couple of minutes to create a personal financial statement form.

Most importantly, you get a better understanding of your financial situation. This includes seeing where your money is going each month and how much debt you have.

What we call around here at Money Bliss – the 1000-foot look from above. The outsider’s perspective of what is going on with your finances.

Benefit #2 – Helps you track your progress

When it comes to personal finance, one of the best things you can do is keep track of your progress.

Tracking your progress should be important to you! By seeing everything laid out in front of you, it becomes much easier to make informed financial decisions that will help improve your overall financial picture.

Benefit # 3- Find some areas of improvement

Since a personal financial statement is a document that summarizes your income, expenses, assets, and liabilities in one place it helps you see the financial big picture. Thus, spotting areas for improvement are easier.

For example, if you see that you are spending too much money on non-essential items, you can make changes to improve your financial health.

Benefit #4 – Useful Tool to Set Goals

Next, it can help you set goals. Once you see where you stand financially, you can set goals for paying off debt or saving more money each month.

This aids you to make better financial decisions by providing a clear picture of your financial situation.

Benefit #5 – Snapshot to help you stay motivated

Creating a personal financial statement can be incredibly helpful in staying motivated to save money and achieve your financial goals. Seeing your progress in black and white (or, more accurately, green and red) can be a strong motivator to keep going.

Using a personal finance statement is especially helpful if you’re working towards paying off debt or saving for a specific goal. It can be difficult to stay motivated when you’re not seeing progress, but seeing the numbers going down (or up) can give you the boost you need to keep going.

Benefit #6 – Monitor your financial health

Creating a personal financial statement can help you monitor your financial health and make informed decisions about your spending and saving habits.

• If you see that your expenses are consistently exceeding your income, for example, you may need to make some changes to ensure that you are able to meet your long-term financial goals.
• Easier to spot opportunities to save money or invest in assets that will grow in value over time.

Monitoring your financial health on a regular basis can help you avoid debt problems and keep track of your progress toward financial goals.

What are the types of personal financial statements?

A personal financial statement is a form or spreadsheet detailing a person’s overall financial health. This statement is typically used to apply for business loans or other forms of financing. There are two types of personal financial statements:

• The first type is the balance sheet, which lists a person’s assets and liabilities.
• The second type is the income statement, which details a person’s income and expenses.

The balance sheet provides an overview of a person’s financial situation at a particular point in time, while the income statement shows how much money a person has coming in and going out over a period of time.

Both types of statements are important in helping lenders evaluate a borrower’s ability to repay a loan. As well as for you to monitor your personal situation.

What are the components of a personal financial statement?

A personal financial statement is not just a document that shows how much money you have in your bank account. It also includes other important components to show a well-rounded picture.

Most people know that a personal finance statement includes income, assets, and liabilities. But did you know there are actually four main components of a personal financial statement?

A personal financial statement varies from a traditional balance sheet that is used for a company.

Your income is everything you earn in a year from all sources, including your job, investments, alimony, and more.

You should list all of your sources of income on your personal financial statement so you have a clear picture of what you’re bringing in each month.

• Include all sources of income, even if they are irregular or one-time payments.
• List after-tax income.
• If you are married or have a partner, include their income as well.
• Update your income regularly to reflect any changes (e.g., new job, raise, bonus).

This will help you make informed decisions about your spending and saving.

This is the money you spend each month on things like your mortgage or rent, car payments, groceries, and other necessary expenses.

Here are over 100 personal budget categories for various expenses.

Assets are everything you own like your home equity or the value of your car and can use to pay your debts. This includes cash, savings, investments, property, and possessions.

Calculate your total assets by adding up the value of all your cash, savings, investments, property, and possessions.

So, is a car an asset ? Well it depends if there is a loan against it.

Liabilities

Your liabilities are everything you owe money on. This includes, but is not limited to:

• Student loans
• Credit card debt
• Any other personal loans

Your liabilities also include any money you may owe in taxes.

How to create a personal financial statement – Part 1

There are a few key things you need to know in order to create a personal financial statement.

The first part includes what is needed for your net worth – assets and liabilities. The second part includes your current income, expenditures, and savings.

We will show you next how to collect all of this information, then you can start to work on creating a personal financial statement.

Step #1 – Determine your current assets and business profit

The first is your current assets. Your assets are everything you own and can use to pay your debts. This includes your savings, your home equity, and any investments you have. You will need to know the value of all of these things in order to create an accurate personal finance statement.

To determine the value of your assets, start by looking at your savings. This can be any money you have in the bank, including checking, savings, and money market accounts. Add up the total balance of all these accounts to get your total savings.

Next, determine the value of your home equity. This is the difference between what your home is worth and how much you still owe on it. To calculate this, look up the current value of your home and subtract any outstanding mortgage or other loan balances from it. This will give you an estimate of how much equity you have in your home.

Finally, add up the values of any investments you have. These can include stocks, bonds, mutual funds, and other types of investment accounts. Once you have all these values totaled up, this will give you an estimate of your current assets.

Step #2 – Determine your current liabilities

Your current liabilities are all of the debts and financial obligations that you currently have.

This can include things like credit card debt, car loans, student loans, and any other type of loan that you are currently paying off.

To get an accurate picture of your current liabilities, you will need to gather up all of your bills and statements so that you can see exactly how much you owe.

Step #3 – Determine your net worth

Your net worth is your assets – your savings, your home equity, and your stocks and investments – minus your liabilities. To calculate it, simply subtract your total liabilities from your total assets. This will give you your net worth.

Your net worth is a good indicator of your financial health.

It can help you make decisions about saving and investing, and it can also be a useful tool for budgeting. If you want to improve your financial health, focus on increasing your net worth by saving more money and investing in assets that will grow in value over time.

Your goal is to double your liquid net worth quickly.

How to create a personal financial statement – Part 2

Now, you have developed your next worth statement. The next step in creating a personal financial statement is to determine your monthly cash flow of money or annual cash flow.

This second part includes your current income, expenditures, and savings.

Step #1 – Determine your monthly income

Firstly, you will need your income flow section. This could come from your pay stubs, or if you are self-employed, your profit and loss statements.

Your monthly income includes all money that you earn in a month, including salary, wages, tips, commissions, child support, alimony, and any other regular payments that you receive.

Step #2 – Determine your monthly expenses

The next piece is to determine your monthly expenses. This includes things like your mortgage or rent, car payments, credit card bills, and any other regular expenses. You’ll also want to factor in occasional expenses, like doctor’s appointments or annual membership fees.

Your expenses can be divided into two categories: fixed and variable.

Fixed expenses are those that remain the same each month, such as rent or mortgage payments, car insurance, and minimum credit card payments. Variable expenses change from month to month and can include items such as groceries, utility bills, entertainment, and clothing.

Step #3 – Determine your monthly savings

Typically, most advice will leave out monthly savings. However, this. is a critical piece to learning how to FI – financial independence.

Once you have both your income and expense information, you can begin to calculate your monthly savings. To do this, simply take your total income and subtract your total expenses. The remaining amount is what you have available to save each month.

Maybe you just calculated this and realize you have a negative number (meaning you spend more than you earn each month), then you will need to make some changes in order to improve your financial situation.

It is important to note that a personal financial statement is not static.

Your income and expenses can change from month-to-month, so it is important to recalculate your statement on a regular basis. Additionally, as you begin to save more money each month, the amount available for savings will increase as well.

How to use a personal finance statement template

A personal financial statement is a snapshot of your financial health at a given point in time. It lists your assets, liabilities, and net worth so you can see the big picture of your finances.

You can use a personal finance statement template to track your progress over time and make changes to improve your financial health.

Here’s how to use a personal finance statement template:

• Enter your information into the template. This includes details about your income, expenses, debts, and assets.
• Review your numbers and calculate your net worth. This is the difference between your total assets and total liabilities.
• Watch for comparisons. Compare your net worth from one period to another to track your progress over time.
• Make tweaks. Make changes in areas where you want to improve, such as increasing savings or paying down debt.
• Repeat steps 1-4 periodically . Then you can see how well you’re doing and make necessary changes

How to interpret a personal finance statement

A personal financial statement is a document that shows your current financial health. It lists your assets and liabilities, giving you a clear picture of your net worth.

• Positive net worth means you have more assets than debt.
• Negative net worth means you have more debt than assets.

Your personal financial statement will help you to set financial goals and track your progress over time. For example, if you want to become debt-free within five years, you can use your statement to create a budget and track your progress each year.

If you have a negative net worth, don’t panic! You can improve your financial health by paying off debts and building up your savings.

Creating a budget will help you make the most of your income and make headway on your financial goals.

How to use a personal financial statement to make financial decisions?

This is the important piece of becoming a millionaire.

A personal financial statement can help you see where your money is going each month and make changes to ensure that you are saving enough for your future goals.

Way #1 – Look at your current financial situation

Your personal financial statement is a record of your income and expenses over a period of time. This information can be used to make financial decisions, such as whether to save money or invest in a new business venture.

If you are looking to save money, you will want to compare your total income to your total expenses. If your expenses are greater than your income, you will need to find ways to reduce your spending. You may also want to consider investing in a savings account or retirement fund.

If you are looking to invest in a new business venture, you will want to assess your current financial situation. You will need to determine how much money you can afford to invest and whether or not the venture is likely to be successful.

Doing this analysis before making any decisions can help you avoid making costly mistakes.

Way #2 – Determine your financial goals

There are a few key things to keep in mind when you’re determining your financial goals.

First, you need to think about your short-term and long-term goals.

• Your short-term goals might include things like saving up for a down payment on a house or car or paying off high-interest debt.
• Your long-term goals might include things like saving for retirement or sending your kids to college.

Once you’ve determined your goals, you need to think about how much money you’ll need to reach them. This is where a personal financial statement can come in handy.

This information can help you figure out how much money you have available to put towards your financial goals.

Once you have an idea of how much money you need to reach your financial goals, the next step is to develop a plan for how you’re going to save that money. This might involve setting up a budget and sticking to it, investing in a specific savings account or investment account, or taking advantage of employer matching programs if they’re available.

Making smart financial decisions is important for achieving both your short-term and long-term goals. A personal financial statement can help you determine how much money you need to reach your goals, and develop a plan for saving that money.

Way #3 – Make a budget

Your personal financial statement can be a helpful tool when you’re trying to make a budget. This document lists your income and expenses and can give you a clear picture of your financial situation.

To use your personal financial statement to make a budget:

• Look at your overall income and expenses. This will give you an idea of where your money is going each month.
• What are Necessary Expenses? Determine which expenses are necessary and which ones you can cut back on.
• Prioritize your List. Make a list of your monthly income and expenses, with the necessary expenses first. And drop the expenses at the bottom of the list.
• How Much is Left? Determine how much money you have left over each month after paying for necessities. This is the money you can use for savings or other goals.
• Adjust your budget as needed based on changes in your income or expenses.

Way #4 – Invest in yourself

There are a lot of things you can do to invest in yourself, but one of the smartest things you can do is to invest in your personal finance education.

In fact, one of the popular millionaire quotes from Warren Buffet is :

Invest in yourself as much as possible. Warren Buffet

Investing in yourself is one of the smartest things you can do.

Way #5 – Stay disciplined

Making financial decisions can be difficult, but if you have a personal financial statement, it can help you stay disciplined.

A personal financial statement is a document that shows your income, expenses, and assets. It can help you track your spending and see where you can save money. That my friend is black and white information.

Making financial decisions can be difficult, but if you have a personal financial statement, it can help you stay disciplined and on track.

What are some common mistakes to avoid when creating a personal finance statement?

There are many common mistakes people make when creating a personal financial statement. This can lead to an inaccurate picture of your financial situation and make it difficult to make informed decisions about your finances.

Any of these common mistakes can also lead to problems down the road because you will be unable to meet your financial obligations.

• Not including all sources of income
• Not including all debts and expenses
• Forgetting to track new sources of income
• Overstating or understating expenses
• Not properly categorizing expenses
• Forgetting to update (or review) the statement regularly
• Not tracking progress over time
• Too scared to seek professional help if needed.

By avoiding these common mistakes, you can create a personal financial statement that accurately reflects your financial situation and helps you make better decisions about your money.

How often should a personal finance statement be updated?

You should update your personal finance statement at least once a year.

However, you may want to update it more frequently if you have significant changes in your income or expenses. For example, you may want to update your personal finance statement after you get a raise or buy a new car.

A Personal Financial Statement Template Example

A personal financial statement is a document that summarizes your financial health.

It includes information about your income, expenses, debts, and assets. This information can be used to make informed decisions about your finances.

There are many personal finance statement templates available online. Some banks and financial institutions offer their own templates. You can also find templates in our free resource library. Once you find a template you like, you can download it and fill it out with your own information.

When filling out a personal financial statement template, be sure to include accurate and up-to-date information.

This will give you the most accurate picture of your financial health. Review your statements regularly to track your progress and make changes as needed.

Time to Create A Sample Personal Financial Statement

When creating a personal financial statement, it is important to include all sources of income, not just your salary. This includes any freelance work, investments, or other forms of passive income. Additionally, make sure to include any government benefits or assistance you receive.

Excluding all sources of income will give you an inaccurate picture of your financial situation and make it difficult to create a realistic budget.

This is something you need to spend dedicated time doing to create a personal financial statement worksheet.

Over time, this wealth management tool will help you to become the next millionaire.

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• Financial Planning

What Is a Personal Financial Statement?

• Definition and Examples

How Does a Personal Financial Statement Work?

Do i need a personal financial statement.

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A personal financial statement is a physical snapshot of your assets compared to your liabilities. It gives you a real-time view of your wealth and helps you assess your current financial situation. While it's beneficial for your own financial growth, lenders may ask for a personal financial statement if you’re applying for a loan

Key Takeaways

• A personal financial statement is a document that lists all your assets, liabilities, and resulting net worth.
• Personal financial statements can be used by individuals and businesses.
• A personal financial statement is important because it shows you if you’re building wealth, and can play a critical role in helping you get approved for loans.
• The most efficient way to keep your personal financial statement up-to-date is to use budgeting software that tracks your net worth for you.

Definition and Examples of a Personal Financial Statement

A personal financial statement is a physical snapshot of your assets compared to your liabilities . It gives you a real-time view of your wealth and helps you assess your current financial situation. While it's beneficial for your own financial growth, lenders may ask for a personal financial statement if you’re applying for a loan

But what are assets and liabilities? Your assets refer to all items you can easily convert to cash, including:

• Bank accounts
• Retirement accounts
• Investment balances
• Real estate
• Personal property with significant value, such as rare art collections, coin collections, antiques, and jewelry

Your liabilities refer to all the debt you owe. They can be:

• Student loans
• Credit card debt
• Car and boat loans
• Loans where you’re the co-signer
• Unpaid taxes
• Medical debt

If your total assets are higher than your liabilities, your personal financial statement reflects a positive net worth . This is a sign that you’re building wealth and signals to lenders that you may be a trustworthy borrower.

If your liabilities are higher than your assets, however, you have a negative net worth. This signals you may be living paycheck to paycheck or spending more than you earn, and you could be seen as a high-risk borrower to lenders.

If you are in a committed partnership or married and share assets, you and your partner can combine assets and liabilities to create a joint personal financial statement.

Suppose you have $200,000 worth of assets. This includes your house, a bank account, and a retirement account. Now let’s say you have $130,000 in liabilities. This includes your mortgage, some student loans , and credit card debt. In this case, your net worth is $70,000.

Here’s an example of how your personal financial statement may look in spreadsheet form:

The Balance

Your personal financial statement will be a lot more complex if you’re creating one for your business. For small business owners, the Small Business Administration (SBA) has a sample personal financial statement you can use as a guide.

Wealth is not defined by the income you accumulate, but by your net worth. A personal financial statement is important because it shows if your net worth is improving or decaying over time. It sheds light on your entire financial picture so you can see if you’re moving closer or farther away from your goals .

For example, suppose your financial goal is to retire early . You’ve officially paid off your debt (minus your mortgage), but you’re not sure how close you are to reaching your retirement goals. You decide to create a personal financial statement to see where you stand.

Below is a guide to how you would fill out your personal financial statement, using the above example.

Step 1: List All Your Assets

Most assets have a clear dollar value (i.e., you can look in your bank account and see what your balance is). But some assets—such as your car, home, or an art collection—may require an appraisal first.

If you’re creating a personal financial statement for a lender, it’s important to be as accurate as possible (and get an appraisal if you’re unsure of the amount). But if it’s just for your own personal records, an educated guess may be fine. This may look like:

• $600,000 in your home
• $150,000 in your 401(k)
• $125,000 in your investment account
• $40,000 in your checking and savings accounts
• $30,000 in your traditional IRA
• $5,000 for your car

Total assets = $950,000

Anything you rent does not count as an asset because you don’t own it. So if you rent a house or lease a car, leave it off your personal financial statement.

Step 2: List All Your Debt 

Your debts are your liabilities. In this example, we’ve stated you’ve paid off all your debt except your mortgage, so that’s the only thing listed here.

• $300,000 on your mortgage

Total liabilities = $300,000

If you pay your credit card bill off in full every month, it’s not considered debt, so don’t include it on your personal financial statement.

Step 3: Subtract the Two Numbers To Get Your Net Worth

In this example, when you subtract the assets from your liabilities, you see that your total net worth is $650,000.

Now, suppose you know you need $1.2 million to reach financial freedom and retire early. Your personal financial statement would show that you’re $550,000 away from your goal. You could then update it again next month to track your progress, and make changes to your spending and saving as needed.

Personal financial statements help individuals understand the overall state of their personal or business finances, and calculate their net worth. They can also be used as a tool when applying for credit such as a mortgage, personal loan, or business loan . To get a snapshot of your financial health, it’s a good idea to create a personal financial statement.

Even if you have a positive net worth, it is not guaranteed you will receive a loan you apply for. Credit history and past debts are also taken into consideration by lenders.

The biggest drawback of personal financial statements is that it’s a frozen snapshot of your financial health at any given time. For it to have a positive impact, you have to update it regularly.

The good news is that there are many online tools you can use to automate your personal financial statement. Two popular options include:

• You Need a Budget (YNAB) : This is a personal finance software with strong financial budgeting features that can automatically track your assets and liabilities for you. As you earn income and pay off debt, your net worth updates in real time.
• Personal Capital : This tool for tracking your net worth acts as more of a wealth management tool, praised for helping you track and optimize investments and spot ways to diversify and manage risk. It connects with more than 14,000 financial institutions and provides a moving snapshot of your net worth.

Clearview Credit Union. " What Is a Personal Financial Statement? " Accessed Oct. 28, 2021.

Personal Capital. " Our Mission: We Transform Financial Lives Through Technology and People ." Accessed Oct. 28, 2021.

The Complete Beginner Guide to Personal Financial Statements

No one wants to be broke, living paycheck to paycheck, or struggling with money. Everyone wants to succeed with their finances. But many people struggling with their finances don’t know how their money works. If you really want to succeed in personal finance, you have to treat your finances like a business with personal financial statements.

Think of yourself like a business

Successful businesses do not just guess how they are performing, they perform detailed analyses regularly. As a corporate accountant and financial analyst for nearly a decade, I spent my work days looking into the details of products at multibillion-dollar companies. We didn’t guess how our finances worked, we understood everything from revenue sources to expenses for every product and customer.

We should take the same approach to our personal finances. In “the business of you,” you have the same concerns as any corporation. Businesses have to generate enough revenue to cover all expenses and have leftover cash to reinvest or pay owners as profit. You also need to earn each month to cover your expenses and have enough left over for savings, investments, and a little fun.

To understand how your personal business is performing, you need the same financial reports that business managers and investors use to make the best decisions. These financial statements are the balance sheet, income statement, and cash flow statement. Lucky for us, with some great, free tools at our disposal, putting together our own personal financial statements isn’t all that difficult or time-consuming.

If you follow along, you will end with your own personal balance sheet, personal income statement, and personal cash flow statement. You will have enough information at your fingertips to understand where your money comes from, where it is going, what you have, what you owe, and if you are on track to meet your financial goals.

Get your financial information in one place

To start, you need all of your financial information in one place. Some people might gather a stack of paper financial statements, but I prefer to log into one website or app and have everything quickly available. I have used similar sites since 2007, and my longtime favorite is Empower . When I log into Empower , I can view a snapshot of all of my financial accounts. I can view balances in one place, or click to view recent transactions and more account details. Take a look at a sample dashboard below.

Empower tracks my spending by category and calculates my net worth automatically. While it is incredibly useful for all of these features, and that’s why we need it today, the most powerful features focus on your investments. Empower will conduct an automatic investment analysis for every connected account. I used information on investment fees to shift to similar, lower-fee mutual funds to save over $300 per year in investment fees. Over the years, that is thousands of dollars I will have for retirement I don’t have to give away to big companies.

So start out by heading to Empower and connecting all of your bank, credit card, loan, and investment accounts. If you connect every financial account, you’ll have the big picture of your finances you need to build all of the financial statements below. Everything we’ve discussed is completely free of charge, which is awesome!

If you have more than $100,000 in investable assets, you may be contacted by Empower for additional investment services. They offer a great advising product, but you are not obligated to accept and can always use the Empower dashboard and tools for free.

Personal Financial Statements: Balance Sheet

In personal finance, we discuss our net worth or the total value of our assets fewer debts. Businesses have the exact same thing, but they call it a balance sheet. A balance sheet shows the net worth of a business, but on a balance sheet, net worth is called shareholder’s equity.

For those of us who have not taken accounting , here is a quick rundown. Assets on the left, liabilities on the right, and shareholder’s equity below liabilities. Assets + Liabilities = Shareholders Equity.

A personal balance sheet is a snapshot in time. From month to month as you earn money and spend money, your personal balance sheet changes daily. If you make a purchase on your credit card, your liabilities increase. If you get paid, your assets increase. If you buy something with cash, your assets go down. This type of change in your balance sheet happens every time you make a purchase or enter into any type of financial transaction.

How to Build a Personal Balance Sheet

I have built a monthly personal balance sheet every month since July 2008. I use a free website called NetWorthShare to track my net worth, which I do every month. I have an epic tracking page of all monthly net worth entries from 2009 to 2011 here . Thanks to the built-in charts, you can watch my net worth slowly build before grad school, drop to near zero as I finished my MBA program, and slowly climb with some real estate-related jumps.

To gather the data for my personal balance sheet, I use my account balances at Empower , the home value from RedFin , and update my car values annually from Kelley Blue Book . Here is a screenshot of my update from January 2017, before I bought my current home.

As you can see, this month my cash went down, other assets ( Lending Club loans that I cashed out) went down, and my credit card balances went way down. I pay my credit cards off in full every month but do to all of my spending on credit cards to maximize travel miles and points for free trips . My stocks and retirement balances were up thanks to a good month in the stock market, and this was the first month I started tracking my wife’s car in our net worth.

This month my net assets were up $12,297 and my debts were down $2,070. My net worth was up $14,367 for the month, or 3.60%.

I started tracking my net worth shortly after leaving college, which makes this a nearly complete view of my net worth over my career. The biggest jumps were all related to buying and selling homes. They make it seem like the big swings from grad school tuition were not so big after all!

Understanding Your Balance Sheet

Assets as a positive number plus liabilities (a negative number) give you your personal net worth. This snapshot from an earlier net worth update shows how equity fits into the balance sheet and makes the personal balance sheet look more like a business balance sheet.

Ultimately, the goal is the grow your equity, or your net worth, over time. Remember that your personal finances are a marathon, not a sprint, and you won’t see your net worth skyrocket instantly. If it was easy to get rich quickly, everyone would be rich! The chart above tracks my net worth for more than nine years!

Analyzing Your Balance Sheet

If you look at business balance sheets for public companies, you will find that most have a positive value for shareholders equity on the balance sheet, but not all. Some have a negative net worth, which is not sustainable in the long run. The same is true for our personal net worths. If you have more debts than you do assets, you have a negative net worth.

This is not uncommon. As student loans and other debt balances rise across the country, more people find themselves buried under debt owing far more than they have. If you have a negative net worth, flipping that balance from red to black should be a top priority. When you budget well and spend less than you earn, higher net worth is inevitable.

Stock analysts and financial analysts use some financial ratios to measure a business’s financial health. We can use the same math for our personal balance sheet to get a better view of your financial health. For example, the quick ratio, also known as the acid test, shows the ability to pay bills over the short term.

To calculate the quick ratio, we divide current assets over current liabilities. “Current” assets are cash and equivalents, while current liabilities are any debts owed in the next month. Large businesses use debts due within one year when calculating the quick ratio.

Using the snapshot of the balance sheet above, the quick ratio is calculated as follows: 12,768/227. In this case, the quick ratio is 56.25. That means I could cover my current liabilities 56 times with my current assets. This is a great result. A quick ratio of 1.0 means you are living literally month to month, or paycheck to paycheck. A quick ratio below 1.0 means you are dealing with immediate liquidity issues and can’t make all required payments.

While the short-term assets category for companies is anything due within a year, I am using within one month as current as that is more appropriate for a person making regular bill payments. From big swings in income or big debt payments, you can undergo a big change in a month’s time. That is why I like to track my finances every month.

Personal Financial Statements: Income Statement

Next, we are going to look at our earnings and expenses over a period of time. This is measured with the income statement or in our case a personal income statement. I actually put together an income statement every month for my business. I give a high-level view every month in my monthly income reports . An income statement is also called a profit and loss statement, or a P&L. I can view my business P&L quickly in Quickbooks .

Below is a screenshot of my business income statement for August 2017. In my regular income reports, I take out my own paycheck (included in the cost of labor) and taxes. This is the full version I use for accounting , income taxes, and financial planning.

While you could use Quickbooks for your personal finances, it may be overkill. But again, Empower has you covered. But before we look at that, let’s look at an old-school spreadsheet example I put together in Microsoft Excel. Here is a personal income statement based on a hypothetical situation. These are fabricated numbers just for this post, and any resemblance to anyone’s actual finances is purely coincidental. I made this spreadsheet publicly available here in  Google Sheets .

So, a net income is what you keep after everything you earn and spend. Your net income at the end of a time period rolls into your balance sheet as cash or assets. There is no right or wrong net income. There is only one rule, IT HAS TO BE GREATER THAN ZERO! The bigger the better. You should put that net income into savings or retirement. You could even put savings as a category under expenses or a deduction of income in the revenue section to build in your savings.

The Empower income statement is displayed as cash flow. Here is a screenshot of the expense section from Empower. When your accounts are connected, your cash flow is automatically calculated for you without doing any work!

Getting details from your income and expense category breakdown is even more helpful. You can look for opportunities to cut expenses, improve your budget , pay off debt, and boost your savings. Your personal income statement is a valuable tool. Use it to make sure you always spend less than you earn so your net worth will rise every month.

Learn More Best Budgeting Apps: Mint Alternatives

Personal Financial Statements: Statement of Cash Flow

The last major statement is the statement of cash flow. For personal financial statement purposes, this is very similar to the personal income statement, so we won’t spend as much time here as we did on the other two. However, it is still an important concept to understand.

In business, the statement of cash flow shows all cash in and out of the business broken down into three categories: operations, investing, and financing.

For personal purposes, the traditional cash flow statement breakdown is not quite as useful. However, every month we all have cash come in (hopefully) and cash goes out. At the end of the day, the accounting statements above show us what assets we have and what liabilities we owe, but not our cash position. That is what the statement of cash flow is for.

The goal here is to minimize cash outflow from operations (living expenses). You also want to see the final “Total Cash Flow” be positive, indicating a net increase in cash.

I have saved this template as another  Google Spreadsheet that anyone can access . Feel free to copy it to your own Google Drive account or into a spreadsheet file on your computer. The only cells that you need to fill in are the grey ones. Everything else is automatic.

What Do Personal Financial Statements Mean?

To wrap up this guide to personal financial statements, we will explore the results and what they really mean for your finances.

The Personal Balance Sheet gives us our liquidity position.  To analyze the information here, look at the quick ratio and acid test.  If your current assets do not meet or exceed your current liabilities, you need to make a quick change to your financial situation.

The Personal Income Statement tells you how much you make in a given period as a net income.  A high net income means you have a good income/spending gap.  A negative net income means you are spending more than you make and should make a quick lifestyle change.

The Personal Cash Flow Statement gives you a breakdown of your cash position in a period.  It is okay for you to have a negative cash flow in some instances, such as paying down debt.  If you do this for too long, however, you will end up in trouble with debt.

Stock analysts grade companies every day and give them ratings for creditworthiness and investment grade.  Compare yourself to publicly traded companies by calculating their quick ratio , return on assets , and profit margin . It is a fun exercise to see your financial health, putting you on track to living a more profitable life.

What is your stock worth? Would an investment in your business be a smart bet? Make your finances something you can be proud of. Take advantage of income from your job and side hustles . Your money should be helping you live the life you want, not holding you back.  If your personal financial statements say otherwise, it’s time to get profitable.

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Home > Finance > Personal Financial Statement: Definition, Uses, And Example

Personal Financial Statement: Definition, Uses, And Example

Published: January 7, 2024

Learn about the definition, uses, and example of a personal financial statement in the world of finance. Understand its importance and impact on your financial planning.

• Definition starting with P

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Understanding Personal Financial Statements

When it comes to managing your finances, having a clear understanding of your financial position is essential. This is where personal financial statements come into play. In this article, we’ll explore the definition, uses, and provide an example of a personal financial statement.

Key Takeaways:

• Personal financial statements provide a snapshot of an individual’s financial position.
• These statements are useful for assessing one’s net worth, cash flow, and financial health.

A personal financial statement is a document that summarizes an individual’s financial situation, including their assets, liabilities, income, and expenses. It provides a comprehensive overview of one’s financial health and can be an invaluable tool for making informed financial decisions.

Let’s delve deeper into the various components of a personal financial statement:

Assets refer to items of financial value that an individual owns. This can include cash, savings accounts, investments, real estate, vehicles, and personal belongings. In the personal financial statement, these assets are listed at their current market value. By calculating the total value of assets, one can determine their net worth.

Liabilities

Liabilities encompass the debts and obligations that an individual owes. This can include credit card debt, mortgages, student loans, car loans, and any other outstanding debts. Similar to assets, liabilities are also listed in the personal financial statement, giving a clear picture of one’s overall financial obligations.

Income and Expenses

The personal financial statement also includes an individual’s income and expenses. Income refers to all sources of money inflow, such as salary, rental income, investments, or any other forms of income. Expenses, on the other hand, encompass all the money outflows, including rent/mortgage payments, utilities, groceries, transportation costs, and other personal expenses. By analyzing this section, one can assess their cash flow and determine if they are living within their means.

Uses of Personal Financial Statements:

• Assessing net worth: By calculating the total value of assets and subtracting liabilities, one can determine their net worth.
• Evaluating financial health: Personal financial statements provide a holistic view of an individual’s financial health, helping identify areas for improvement.
• Applying for loans: Lenders often require personal financial statements when assessing an individual’s creditworthiness.
• Planning for the future: These statements serve as a foundation for setting financial goals and creating a budget.

Example of a personal financial statement:

Let’s take a look at a simple example of a personal financial statement:

Personal Financial Statement of John Doe

• Cash: $10,000
• Savings Account: $20,000
• Investments: $50,000
• Real Estate: $150,000
• Total Assets: $230,000
• Mortgage: $100,000
• Student Loans: $20,000
• Credit Card Debt: $5,000
• Total Liabilities: $125,000
• Salary: $60,000
• Rental Income: $12,000
• Total Income: $72,000
• Monthly Rent/Mortgage: $1,500
• Utilities: $200
• Groceries: $400
• Transportation: $300
• Total Expenses: $2,400

In this example, John Doe’s net worth is calculated by subtracting his liabilities ($125,000) from his assets ($230,000), resulting in a net worth of $105,000. His monthly cash flow can also be determined by subtracting expenses ($2,400) from income ($6,000), resulting in a positive cash flow of $3,600.

Personal financial statements are crucial for managing your finances effectively. By regularly updating and analyzing your personal financial statement, you can gain valuable insights into your financial standing and make informed decisions to achieve your financial goals. Whether you’re applying for a loan, evaluating your financial health, or simply aiming to improve your financial well-being, personal financial statements are an essential tool in your financial toolkit.

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What is a personal financial statement?

PayPal Editorial Staff

February 15, 2024

A personal financial statement is an overview of a person or household's finances. Unlike a budget, a financial statement doesn't track every dollar earned or every expense throughout a period. Instead, it's a snapshot of their financial standing at any given moment.

Read on to learn what goes into a personal financial statement, why people may use them, and more.

Personal financial statements explained

Personal financial statements can be for individuals or households, and they commonly include two parts:

• A balance sheet that lists a person's assets, liabilities, and net worth.
• An income statement that shows sources of income and total annual income.

Here's what goes into each.

Assets can be cash, investments, and other items of value that someone owns. Common examples of assets include:

• Cash and money in bank accounts
• Stocks, bonds, and other investments
• Retirement account funds
• A home, vehicle, boat, jewelry, and other valuable property

Liabilities

Liabilities are outstanding debts. They’re generally listed with the monthly payment and the current balance. Liabilities may include:

• Credit card debt
• Personal, student, auto, home, and vehicle loans
• Collection accounts
• Legal claims and judgments
• Unpaid taxes
• Co-signed or guaranteed loans

Subtract the sum of the liabilities from the sum of the assets to find the person or household's net worth. The resulting net worth may be negative, but that's not necessarily bad. For example, many people have a negative net worth while paying off their mortgage. Net worth isn’t a full indication of someone’s financial health but can serve as another tool to broadly encapsulate what someone owns and owes.

A personal income statement lists various sources of income along with the estimated monthly and annual totals. These may include income from:

• Wages, salary, and commissions
• Side gigs or a business
• Rental income after expenses
• Alimony or child support

What is the purpose of personal financial statements?

There are various reasons someone may want to create a personal financial statement, such as:

Assessing financial health

For people who don't regularly budget or track their accounts, creating a financial statement may be a helpful way to understand their savings, debt, and overall financial health. It may spur them to start saving money or reassure them that they're doing well financially.

Facilitating financial decisions

Reviewing a financial statement may be helpful before making a big decision, such as deciding between buying a new or used vehicle. It can give someone a clearer picture of where their finances stand and, in turn, potentially help them figure out whether a significant purchase is the right choice.

Supporting financial goals

People may want to track their financial statements over time to see how they're progressing with financial goals. For example, someone could list an emergency fund under their assets and keep track of any growth in their balance from one month to the next. Similarly, tracking total liabilities could be helpful when paying off debt to visualize progress and maintain a plan to pay it off.

Preparing a personal financial statement

Some financial institutions may have personal financial statement forms for customers, but people can also create their own statements using a spreadsheet or software. In either case, here are some steps to take when creating a personal financial statement:

• Gather and organize financial information:  Review the most recent statements or log into every financial account to find current balances and monthly payments. Use these to add up current assets, liabilities, and income.
• Connect and sync accounts:  It may be possible to connect accounts to a well-trusted budgeting app to find and easily capture current balances. Even if the apps don't call it a financial statement, many make it easy to review assets, liabilities, and net worth. However, income may need to be calculated separately.

Whether using an app or other third-party service, it’s important to only share financial information with trusted sources. Be sure to do research on any third party before sharing information and remain wary of anyone requesting excessive information.

All in all, personal financial statements can often be an important tool for tracking financial health over time. Some people do this monthly alongside their budget. If that's too difficult without software, consider updating a financial statement every six months to a year. Keeping it updated may make it easy to continuously follow progress for financial goals, maintain understanding of debt balances, and potentially help make decisions for future money management.

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Understanding Personal Financial Statements: A Comprehensive Guide

Table of content, what’s in this guide, personal balance sheet, how to create a personal balance sheet, calculating and interpreting your net worth, pros of creating a personal balance sheet, personal balance sheet limitations, pro tips on creating and maintaining a personal balance sheet, personal cash flow statement, how to create a personal cash flow statement, calculating and interpreting your net cash flow, pros of creating a personal cash flow statement, personal cash flow statement limitations, pro tips on creating and maintaining a personal cash flow statement, personal balance sheet case study, personal cash flow statement case study, grab your free personal financial statement template here, the bottom line.

Financial literacy isn’t just a skill; it’s a necessity in our complex modern economy. Our financial landscape is filled with many challenges—from managing debt and investments to planning for retirement. A personal financial statement is one key financial document that makes navigating these challenges easy.

Personal financial statements, which comprise a balance sheet and cash flow statement, provide a snapshot of your financial health, allowing you to evaluate your current financial condition, track changes over time, and plan for the future. Imagine seeing, at a glance, areas where you can reduce spending, if your net worth is increasing or decreasing, or if you are on track to meet your financial goals.

That’s the kind of clarity these statements provide. They don’t just contain numbers; they provide insights into your financial health, facilitating better decisions and effective long-term planning. For example, a cash flow statement can reveal if you are spending too much on non-essential items, while a balance sheet can show if your debt is becoming unmanageable.

Additionally, analyzing these statements together provides a broad view of your financial situation, helping you identify potential issues before they become significant problems. For instance, if your cash flow statement shows a consistent surplus, but your balance sheet reveals increasing debt, that might be a sign that you are not using your surplus efficiently to pay down debt.

In this guide, we’ll walk you through the two common types of personal financial statements: the personal balance sheet and the personal cash flow statement. We’ll explain each statement, their typical line items, the benefits of creating them, and their limitations.

Finally, we’ll share some pro tips on creating and maintaining each statement, and we’ll examine two case studies that illustrate how each statement can help individuals make better financial choices. At the end of the guide, you will be able to download a free template to get you started on monitoring your finances.

Let’s dive right in.

In a hurry and can’t read this guide in one go? Download the free PDF version to read whenever you have the chance!

Download Link:  Understanding Personal Financial Statements: A Comprehensive Guide

A personal balance sheet provides a snapshot of your financial position at a specific period, typically a month or a year. It outlines what you own (assets), what you owe (liabilities), and the difference between the two, known as your net worth. Assets include your house, car, investments, and savings, while liabilities encompass debts such as your mortgage, car loan, and credit card balances.

For instance, say your assets include a $350,000 house, a $30,000 car, $80,000 in investments, $30,000 in savings, and $10,000 in other assets, totaling $500,000. On the other hand, your liabilities include a $150,000 mortgage, $20,000 car loan, $10,000 credit card debt, $15,000 student loan, and $5,000 in other debts totaling $200,000. In this scenario, your net worth would be $500,000 (Total Assets) – $200,000 (Total Liabilities) = $300,000.

Understanding, creating, and maintaining a personal balance sheet helps you make informed decisions about investments, loans, and other financial matters. For example, by knowing your net worth, you can determine how much debt you can afford for a new home or car, how much you can reasonably invest, or whether you need to focus on paying down existing debt.

A personal balance sheet consists of two major categories: assets and liabilities. You can further divide these categories into subcategories that outline what you own and owe. Let’s briefly examine the typical structure of a personal balance sheet.

“Assets” is the first section on a personal balance sheet, and it covers everything you own that has a monetary value. These include tangible items like your home, car, and personal belongings, as well as intangible items like investments and savings accounts. Essentially, anything you could sell or cash in for money is considered an asset.

Assets are typically categorized into two groups: liquid and non-liquid assets. Let’s briefly examine the types of assets that fall under each group.

Liqui d Assets

“Liquid Assets” is the first category under the “Assets” section. It includes all assets that can be quickly and easily converted into cash without losing much value. Such assets include the following: 

• Cash and Cash Equivalents: This subcategory accounts for physical cash, checking accounts, savings accounts, certificates of deposit, and money market accounts, which are investments easily convertible to cash, making them as liquid as cash.
• Liquid Investments: This subcategory covers stocks, bonds, mutual funds, exchange-traded funds, and other liquid investment assets. You can convert these assets to cash relatively quickly without losing much value.

Non-Liq uid Assets

“Non-Liquid Assets” is the second category under the “Assets” section. This subcategory covers all assets that cannot be easily converted into cash or would lose value in the process. Such assets include the following:

• Retirement Accounts: This subcategory includes all forms of retirement funds you have. While the assets within a retirement account (like a 401(k) or an IRA) may be liquid, there are often penalties and tax consequences for withdrawing funds before a certain age. This is why it is usually classified as a non-liquid asset.
• Real Estate: This subcategory covers the market value of your home, rental properties, or any other real estate properties you own.
• Personal Property:   This subcategory includes the value of tangible assets such as cars, jewelry, furniture, electronics, collectibles, and other personal belongings. Note that these items should be valued at what they could be sold for now, not what was initially paid for them, as the value of many items depreciates over time, and overvaluing your assets can result in an inflated net worth. 
• Business Ownership: If you own a business, the value of your ownership stake is an asset and should be recorded under this subcategory.
• Other Assets: This subcategory accounts for any other assets not included in the preceding subcategories, such as loans you have given to others, tax refunds expected, etc.

Liabilities

“Liabilities” is the second section on your personal balance sheet, and it represents all debts and financial obligations. These can include various forms of debt, such as mortgages, car loans, credit card balances, and personal loans. Essentially, anything you need to pay back to others, whether to a bank, a credit card company, or a friend, is considered a liability.

Just as with assets, liabilities are also usually categorized into two groups: short-term and long-term liabilities. Let’s briefly examine the types of liabilities that fall under each group.

Shor t-Term Liabilities

“Short-Term Liabilities” is the first category under the “Liabilities” section. It includes all debts that are due within a year. Such liabilities include the following:

• Credit Card Balances: This subcategory highlights all you owe to credit card companies.
• Utility Bills: This subcategory covers all your utility bills, such as electricity, water, gas, and internet.
• Medical Bills: This subcategory includes any outstanding bills you owe for medical services or treatments. This can include doctor’s visits, hospital stays, and prescription medications. 
• Personal Loans: This subcategory accounts for any loan you take out for personal reasons, such as to cover unexpected expenses or to consolidate debt, and are due within a year.
• Payday Loans: This subcategory covers all short-term loans typically due on your next payday. 
• Overdrafts: This subcategory highlights the amount by which withdrawals from your bank account exceed the available balance.
• Taxes Due: This subcategory includes everything you owe to the government in taxes. This can include income, property, and any other taxes due within a year.
• Other Short-Term Liabilities: This subcategory accounts for every other bill or money you owe and is due within a year, such as insurance premiums, subscription services, gym memberships, and contingent liabilities, which are potential liabilities that depend on a future event.

Long-Term Liabil ities

“Long-Term Liabilities” is the second category under the “Liabilities” section. It includes all debts that are due in more than a year. Such liabilities include the following:

• Mortgage: This subcategory covers every mortgage you’ve taken on your home. It is typically the most significant liability for most people and is paid off over many years, often 15 to 30 years.
• Auto Loan: This subcategory includes any car loans you’ve taken out. These loans are typically paid off over a period of 3 to 7 years.
• Student Loans: This subcategory highlights any student loans you’ve taken out, which typically have a 10- to 30-year repayment period.
• Personal Loans: This subcategory accounts for any loan you take out for personal reasons, such as to cover unexpected expenses or to consolidate debt, and are due after a year.
• Pension Liabilities: This subcategory spotlights the amount you owe to your pension plan if you have borrowed against it.
• Long-Term Lease Obligations: This subcategory includes the amount you owe on any long-term lease, such as a car or equipment lease.
• Other Long-Term Liabilities: This subcategory covers any other long-term obligations that do not fit the preceding categories, such as a lawsuit settlement being paid off over time.

“Net Worth” is the final figure on a personal balance sheet. This figure is a clear indicator of your financial health, and you can calculate it using the following formula:

• Net Worth = Total Assets – Total Liabilities

For instance, let’s assume you own a house valued at $350,000, have a car worth $20,000, a retirement account with $50,000, and a savings account with $10,000, putting your total assets at $430,000. Let’s further assume you have a mortgage balance of $200,000 and a car loan of $15,000, putting your total liabilities at $215,000. In this scenario, your net worth would be:

• Net Worth = $430,000 (Total Assets) – $215,000 (Total Liabilities) = $215,000

This positive net worth of $215,000 implies that you own more than you owe, which is the ideal financial position to be in. Suppose your liabilities had exceeded your assets in the preceding scenario. In that case, you’d have a negative net worth, meaning you owe more than you own. 

Your net worth is a crucial measure of your financial stability. A high positive net worth implies that you are in a strong financial position and have effectively managed your income, savings, investments, and debts. A negative net worth, on the other hand, signals the need to reevaluate your financial habits to reduce debts and increase assets to avoid financial insolvency.

Understanding your financial situation is crucial for making informed decisions about your future. A personal balance sheet is a valuable tool for gaining this understanding. Here are some key benefits of creating and maintaining this financial statement:

Increased Financial Awareness

Regularly creating and reviewing your balance sheet increases your awareness of your financial situation. This heightened awareness can lead to better financial decisions, such as avoiding unnecessary debt and expenses, making better investment choices, and being more disciplined with savings.

For instance, if you notice that a large portion of your income is spent on dining out and entertainment, this awareness could lead you to make more disciplined spending choices, such as cooking at home or choosing free entertainment options.

Moreover, understanding your financial situation can also lead to psychological benefits. For example, knowing that you have a manageable level of debt and a solid savings plan reduces financial anxiety and increases confidence in your ability to achieve your financial goals. Additionally, this awareness fosters a sense of control over your finances, encourages a more disciplined approach to spending and saving, and promotes a more positive and proactive outlook towards your financial future.

Snapshot of Financial Health

A balance sheet provides a quick, overall view of your financial health by showing your assets and liabilities at a glance, making it easier to identify financial strengths and weaknesses. For example, if your balance sheet reveals that your credit card debt is more than 50% of your total assets, it’s a clear sign that you need to focus on debt reduction. Ignoring this signal could lead to escalating debt, higher interest payments, and a lower credit score.

Conversely, if your balance sheet shows that your assets are three times greater than your liabilities, that implies positive financial strength. You could leverage this strength by investing in higher-yield assets or taking on manageable debt to invest in opportunities with a high return on investment.

However, it is crucial to approach this cautiously and consider the potential risks involved. Do thorough research or consult a financial advisor before making significant financial decisions.

Wealth Tracking

Creating and updating your personal balance sheet regularly helps you monitor your wealth over time. This ongoing tracking lets you see if you’re progressing toward your financial goals and pinpoint areas needing improvement.

For example, if you observe that the value of your stock portfolio has decreased significantly over the past year, this might indicate that your investment strategy needs to be reevaluated. Failing to take action could result in further losses, considerably reducing your overall wealth.

It’s important to factor in economic variables like inflation when assessing your financial growth. A nominal increase in wealth doesn’t always equate to an actual increase in financial well-being. For instance, a 3% increase in your wealth over the past year may seem positive, but if the inflation rate is 5%, your real wealth has actually decreased by 2%. It’s great to see your wealth grow year after year, but it’s essential to ask yourself: does the growth rate outpace or at least keep up with inflation?

Financial Planning

A personal balance sheet is an effective tool for planning financial goals. By knowing your net worth, you can devise better strategies for saving, investing, or debt repayment, helping you make informed decisions to achieve your financial goals. Let’s say you notice that your net worth is decreasing; it might be time to cut expenses, pay down debt, or reconsider large purchases or investments.

For example, if your net worth has decreased by 10% over the past year, you might decide to sell non-essential assets, reduce discretionary spending, or refinance your debt to lower interest rates. Doing a mix of the preceding will help you increase your net worth.

Additionally, a personal balance sheet can help you create a clear and detailed financial plan. For example, by knowing your net worth, you can set realistic savings and investment goals for the next year.

Remember, it is necessary to regularly revisit and adjust your financial plan and goals as your financial situation changes. Factors that may necessitate a change in your plan include a change in income, unexpected expenses, or changes in your financial goals. For example, if you receive a promotion and a salary increase, you may want to adjust your savings and investment goals accordingly. Similarly, if you incur unexpected medical expenses, you may need to adjust your budget and debt repayment plan .

Advanced Financial Analytics

Creating and maintaining a personal balance sheet makes it easier to calculate and track important personal financial ratios like the debt-to-asset ratio and capitalization ratio. These ratios are crucial for assessing your financial health and stability. For example, the debt-to-asset ratio helps you understand how much of your assets are financed by debt. In contrast, the capitalization ratio helps you understand your financial structure by showing the proportion of debt owed relative to equity owned.

While a personal balance sheet is an indispensable tool for understanding your financial health, planning your financial future, and making informed financial decisions, it’s also important to recognize its limitations. Knowing them helps you better interpret the information your balance sheet provides and understand what additional steps you may need to take to neutralize each limitation. Here are some key limitations of a personal balance sheet:

Doesn't Show Cash Flow

A balance sheet provides a snapshot of your financial situation at a specific point in time but doesn’t show cash flow. A cash flow statement provides a dynamic view of how money is earned and spent over a specific period. This can highlight issues not immediately apparent from the balance sheet, such as a negative cash flow despite a positive net worth. For example, someone might have a high net worth and still have cash flow problems because most of their assets are illiquid (e.g., real estate, long-term investments, etc.). Creating and maintaining a balance sheet and a cash flow statement is a great way to overcome this limitation.

Fluctuating Values

The values of assets and liabilities can fluctuate over time, making the balance sheet a snapshot accurate only at the moment it’s prepared. And this variability can significantly impact your financial planning and decision-making. For example, if you intend to sell some of your stocks, the value of those stocks when preparing the balance sheet may differ from the value at the time of the sale. This discrepancy could result in overestimating or underestimating the sale proceeds in your budget, each having distinct repercussions.

Consider a scenario where you plan to use the sale proceeds to repay debt. If the actual proceeds are lower than anticipated, you may find yourself unable to cover the debt fully, leading to additional interest charges or penalties. For this reason, it’s crucial to update your balance sheet frequently and exercise caution when making financial decisions based on it.

Subjective Asset Valuation

Some assets, like jewelry, art, or antiques, can be difficult to value accurately, making it challenging to create an accurate personal balance sheet. For instance, valuing a piece of art at $12,000 when it’s actually worth $5,000 will inflate your net worth and potentially mislead your financial planning. It’s advisable to consult a professional appraiser for items of significant value to mitigate this limitation.

Dependency on Accurate Data

The effectiveness of a balance sheet depends on the accuracy of the data inputted. Even minor errors in asset or liability values can lead to incorrect conclusions about your financial health. For example, an underestimation of debt by $1000 may seem inconsequential, but when interest is taken into account, the actual value of that debt could be significantly higher over time. This could lead to understating the time and money required to repay that debt.

Creating a personal balance sheet is crucial for anyone interested in managing their finances responsibly. However, the real benefit of a personal balance sheet lies not just in its creation but in regularly updating and using it wisely. Here are some pro tips to help you make the most of your personal balance sheet:

Start with Accurate Information

Gather all your financial documents, such as bank statements, mortgage statements, and credit card bills, before creating your balance sheet. Doing so will help ensure you don’t miss any assets or liabilities.

Categorize Your Assets and Liabilities

Break down your assets and liabilities into categories such as liquid assets (cash, savings), non-liquid assets (real estate, investments), short-term liabilities (credit card debt, other debts due within a year), and long-term liabilities (mortgage, student loans).

Consider Future Liabilities

Include expected future liabilities, such as a child’s college education, a planned home renovation, or future taxes, in your personal balance sheet. Doing so will help make your financial planning more accurate and effective.

For example, let’s say you’re planning for your child’s college education. You can estimate this future liability by researching the current tuition fees of the college your child might attend and its historical growth rate.

Suppose the current tuition fee is $30,000 per year, and historically, the tuition fee has increased by 5% annually. You can estimate that in 10 years, the tuition fee would be approximately $48,890 per year ($30,000 × (1 + 0.05)^10). This estimation will help you plan and save accordingly.

Use Conservative Values

Be conservative when estimating the value of your assets. This means using the lower end of an estimated value range and being cautious when including assets whose value is highly uncertain. Overestimating the value of your assets provides a false sense of financial security and leaves you unprepared for unexpected financial downturns.

Be Thorough

Being conservative matters a lot in creating an accurate personal statement, but so does being thorough. Ensure you include all your assets and liabilities, even if they seem insignificant. Small amounts can add up over time and may affect your financial health more than you realize. Assets and liabilities commonly overlooked include:

• Digital assets like cryptocurrency;
• Intellectual property (e.g., copyrighted material, patents);
• Collectibles (e.g., rare coins, stamps); and 
• Prepaid expenses (e.g., prepaid insurance, prepaid rent).

Liabilities: 

• Outstanding medical bills;
• Unpaid taxes;
• Personal loans from friends or family; and 
• Any accrued interest on existing loans.

Update Regularly

Update your balance sheet at least every quarter or when there is a significant change in your assets or liabilities, such as receiving an inheritance, buying a house, and paying off or incurring a debt. Recording changes in your assets and liabilities is the best way to spot trends you would have otherwise missed. Moreover, doing so helps make your balance sheet more accurate.

Review Past Balance Sheets

While you should update your personal balance sheet at least four times a year, it’s a good idea to monitor it regularly. Set a schedule for reviewing your personal balance sheet, such as monthly or quarterly. Regularly reviewing past balance sheets can help you identify trends, understand how your financial situation has changed, and make more informed decisions about the future.

Use Alongside A Cash Flow Statement

To better understand your financial health, use your personal balance sheet together with a personal cash flow statement. While the balance sheet provides a snapshot of your financial health at a specific point in time, the cash flow statement shows how you earned your money or spent it over a specific period. Using both financial statements will help you identify trends, gain more insights, and make more informed financial decisions.

Take Advantage of Tools and Templates

There are various tools and templates available online, such as Microsoft Excel templates, personal finance apps, or online budgeting tools that offer personal balance sheet templates. You can start with a basic template from Microsoft Excel and customize it to include categories specific to your financial situation, like adding a section for digital assets or future liabilities.

Reflect and Act

After creating your balance sheet, reflect on your financial situation. Are you meeting your financial goals? Do you need to adjust your spending or saving habits? Use your balance sheet as a tool for making informed financial decisions.

Seek Professional Help

If you are dealing with a complex financial situation, such as managing investments across multiple platforms, dealing with significant debt, or planning for retirement, it might be beneficial to seek advice from a certified financial planner or wealth manager. A financial planner can help you create a comprehensive financial plan, while a wealth manager can help you manage your investments and optimize for tax efficiency.

A personal cash flow statement tracks how much cash you’re earning and where it’s being spent over a specific period, typically a month or a year. This statement provides valuable insights into how you are managing your cash resources, enabling you to understand your spending patterns and make better financial decisions.

A personal cash flow statement records cash inflows and outflows during a specific period. Think of it as a story of your personal finances from a cash perspective, showing you where your money came from (inflows), where it went (outflows), and the net difference between the two. If your inflows exceed your outflows, then you’ll have a positive cash flow. Conversely, if your outflows exceed your inflows, then you’ll have a negative cash flow.

For example, let’s say your monthly cash inflows (salary, freelance work, etc.) are $5,000, and cash outflows (rent, utilities, groceries, etc.) amount to $3,200. In this scenario, your personal cash flow statement for that month would show a surplus of $1800, money you can put towards savings, investment, or other financial goals.

A personal cash flow statement typically consists of two main sections: cash inflows and cash outflows, which can be further divided into various categories and subcategories.

When creating a personal cash flow statement, it is essential to break down your cash inflows and outflows into different line items that track your income sources and expenditures. This detailed breakdown provides a clearer view of your financial situation, helping you identify potential areas for savings or producing additional income.

Let’s briefly examine the typical structure of a personal cash flow statement.

Cash Inflows

“Cash inflows” is the first section on a personal cash flow statement; it covers all the money that comes into your possession during a specific period, usually monthly or yearly. These inflows can include your salary, bonuses, dividends from investments, rental income, money received from selling assets, gifts, or any other sources of income. Essentially, any money you receive or earn is a cash inflow.

Cash Inflows are typically grouped into three categories: earned income, passive income, and other income. Let’s briefly examine the types of cash inflows that fall under each category.

Earned Income

“Earned Income” is the first category under the “Cash Inflows” category. It covers any money you earn by providing a service, working a job, or running a business. 

Common types of income under this category include the following:

• Salary/Wages: This line item covers your primary income source, typically earned through employment or self-employment. This is generally the largest portion of your income.
• Bonus/Commissions: This line item includes any additional income from your primary employment beyond your salary or wages.
• Business Income: If you have a side business or gig, such as freelance work or a small online business, include the gross income (i.e., income after business-related expenses are deducted) under this subcategory. For example, if you have a freelance business and earn $10,000 monthly but have $2,000 in business-related expenses (such as advertising, supplies, etc.), you would record $8,000 ($10,000 – $2,000) under this subcategory.

Passiv e Income

“Passive Income” is the second category under the “Cash Inflows” section, and it highlights any cash you earn without active, ongoing effort after the initial groundwork or setup. This category typically contains the following subcategories:

• Investment Income: This subcategory accounts for stock dividends, bond interest payments, rental property income, or any other income you earn from your investments. For example, if you own 100 shares in a company that pays $1 in dividends per share quarterly, you would receive $100 every quarter. This $100 would be recorded under this subcategory.
• Non-Investment Passive Income: This subcategory covers any income from passive ventures or endeavors where capital investment isn’t the primary driver, such as royalties from intellectual property and ad revenue from websites, blogs, or YouTube channels.

Oth er Income

“Other Income” is the third category under the “Cash Inflows” section, and it includes any other money you receive that doesn’t fall under the categories of earned or passive income. Typical subcategories under this category include the following:

• Asset Sales: If you’ve sold any assets like cars, furniture, investments, etc., the cash generated from these sales would be recorded under this subcategory. For example, if you sold a car for $10,000, this amount would be recorded under the “Sale of Assets” subcategory. Similarly, if you sold shares of stock for a total of $5,000, this amount would also be recorded here.
• Miscellaneous Income: This subcategory tracks all miscellaneous income sources like alimony, child support, social security income, lottery winnings, gifts, and inheritance. For example, if you received $500 as a reimbursement from your employer for work-related expenses, $200 as a refund from a returned purchase, and $50 as cashback from your credit card, you would record these amounts under this subcategory.

Cash Outflows

“Cash outflows” is the second section on a personal cash flow statement, and it represents all the money you spend during a specified period, typically monthly or yearly. These outflows include expenses such as rent or mortgage payments, utility bills, groceries, transportation costs, loan repayments, and entertainment. 

Essentially, any money you spend is a cash outflow, and unlike cash inflows, which increase your available funds, cash outflows reduce them. Let’s briefly examine the types of cash outflows that fall under this section.

Ess ential Expenses

“Essential Expenses” is the first category under the “Cash Outflows” section. It tracks all necessary costs you incur to maintain your basic standard of living. In other words, this category covers every cash you spend on needs rather than wants. Another way to think about essential expenses is that they are cash you need to spend to survive and function in society. Common types of expenses under this category include the following:

• Housing: This subcategory covers your mortgage or rent payments, maintenance, property tax, and renters’ insurance, among other housing-related costs. If you own a home, you will have property tax expenses; if you rent, you may have renters’ insurance. Accounting for these variations makes your cash outflows more accurate.
• Utilities: This subcategory accounts for basic services vital to everyday living, such as electricity, gas, water, sewer, trash, internet service, and phone bills.
• Food: This subcategory typically includes groceries and other essential food-related expenses, like school lunches for children or meals for elderly family members.
• Transportation: This subcategory highlights car payments, gas, insurance, maintenance, public transit, ride-share costs, vehicle registration, tolls, parking, and all other transportation-related expenses. 
• Healthcare: This subcategory covers health insurance premiums, out-of-pocket medical costs, prescriptions, alternative therapies, health supplements, and all other healthcare-related expenses. 
• Education: This subcategory includes tuition, textbooks, online courses, professional development, workshops, seminars, conferences, school supplies for kids, tutoring, educational software, and other education-related expenses. 
• Essential Personal Care: This subcategory includes clothing, personal grooming, dental care, cosmetics, skincare, and other personal care-related expenses. 
• Child Care/Support: This subcategory covers child care costs, school fees, child support payments, and other related expenses. 
• Insurance: This subcategory spotlights life insurance, disability insurance, and other insurance-related expenses. 
• Taxes Paid: This subcategory covers any additional tax payments you may make, such as estimated tax payments, that are not automatically deducted from your income. 
• Miscellaneous Essential Expenses: This subcategory covers essential expenses that don’t fit into the preceding subcategories. These include prescription glasses or contacts, special dietary needs, home safety equipment, professional licensing or certification fees, alimony payments, bank fees, etc.

Non-Essential Expenses

“Non-Essential Expenses” is the second category under the “Cash Outflows” section. All expenses that aren’t necessary for your survival or basic comfort but contribute to your lifestyle and happiness fall under this category. These expenses are typically optional and can be reduced or eliminated if necessary. Common types of non-essential expenses under this category include the following:

• Dining and Entertainment: This subcategory covers cash spent on meals, snacks, and beverages from restaurants, cafes, takeout, and delivery services.
• Luxuries: This subcategory includes any cash spent on things like jewelry, high-end electronics, designer clothing, etc.
• Non-Essential Personal Care: This subcategory accounts for expenses that are not necessary for maintaining basic health and hygiene. These expenses include spa and massage treatments, luxury cosmetics and skincare, tanning, etc.
• Leisure and Entertainment: This subcategory includes a wide range of expenses like gym memberships, subscriptions (like Netflix, Spotify, club memberships, etc.), hobbies, vacations, cultural events, theater, concerts, etc. 
• Miscellaneous Non-Essential Expenses: This subcategory accounts for all the expenses that are not crucial for your survival, basic comfort, or regular lifestyle but don’t fit into any existing non-essential expenses subcategories. These include gifts, donations, decor, special occasions, pet-related expenses, books, magazines, etc.

Non-Recurring Expenses

“Non-Recurring Expenses” is the third category under the “Cash Outflows” section. It accounts for essential or non-essential expenses that don’t occur regularly or predictably and don’t fit under preceding categories and subcategories. For example, acquisition of assets, legal fees, or any unexpected expenses like family emergencies. Common types of non-recurring expenses under this category include the following:

• Assets Acquisition: If you’ve bought assets like property, vehicles, or other large purchases, the cash used for these acquisitions would be recorded under this subcategory. 
• Property Loss: Expenses related to replacing lost or stolen property not covered by insurance, such as replacing stolen electronics, furniture, or other valuable items, can be recorded here.
• Family Emergencies: Expenses related to unexpected family emergencies, such as travel costs for a family member’s funeral or medical emergency, can be recorded here.

Debt Payments

“Debt Payments” is the fourth category under the “Cash Outflows” section. Any money used to repay the principal and interest on your debts is recorded under this category.

“Savings” is the fifth category under the “Cash Outflows” section. It tracks whatever income is set aside for future use, such as an emergency fund, retirement, or specific financial goals. Common line items under this category include goal-specific savings, emergency funds, retirement accounts, etc.

Investments

“Investments” is the sixth category under the “Cash Outflows” section. It covers any money used to purchase assets with the expectation that they will generate a return in the future. Line items commonly recorded under this category include stocks, bonds, mutual funds, real estate, start-up investments, etc.

Calculating your net cash flow is the final step in creating your personal cash flow statement. Net cash flow is the figure you get after subtracting your total cash outflows from your total cash inflows. It’s a vital indicator of your financial liquidity. You can calculate this figure using the following formula: 

• Net Cash Flow = Total Cash Inflows – Total Cash Outflows

To illustrate how to calculate net cash flow, let’s consider the following example. Assume your total cash inflows, which include your salary of $4,000, investment income of $500, and other income sources of $500, come to $5,000 per month. And your total cash outflows, encompassing costs such as housing ($1,500), food ($500), transportation ($400), personal expenses ($400), and debt repayments ($900), sum up to $3,700 per month. In this case, your net cash flow would be:

• Net Cash Flow = $5,000 (Inflows) – $3,700 (Outflows) = $1,300

Your net cash flow is $1,300 in this scenario, indicating a positive cash flow. This means you earn more than you spend, leaving you with excess cash that can be used for savings, investments, or reducing debt.

Interpreting your net cash flow involves understanding what the number means for your financial health. A positive net cash flow indicates a healthy financial situation where you live within your means and have leftover income to allocate towards savings, investments, or debt repayments. This is generally an ideal financial position to be in.

Conversely, if your net cash flow is negative, you spend more than you earn. A negative net cash flow could be due to one-time large expenses or indicate a pattern of overspending. If it’s the former, this may not pose a long-term issue, but if it’s the latter, you may need to reassess your budget and spending habits. Creating a detailed budget, tracking your expenses, and identifying areas where you can cut back or increase your income can help turn a negative net cash flow into a positive one.

To summarize, your net cash flow reveals whether you’re living within your means or overspending. It can serve as a wake-up call to adjust your spending habits or as a green light that you’re on track with your financial plans.

Creating a personal cash flow statement is more than just a financial exercise; it can help you develop a roadmap to your financial freedom. Whether you’re struggling with budgeting, debt, or planning for the future, a personal cash flow statement can provide invaluable insights. Here are some of the key benefits you unlock when you create a personal cash flow statement:

Regularly updating and reviewing your personal cash flow statement not only helps you keep tabs on your financial situation but also increases your awareness of your spending habits. For example, regularly reviewing your personal cash flow statement might help you notice that you’re consistently spending $100 monthly on takeout. Noting this pattern is the first step toward deciding whether this is an area where you can and should cut back.

Interestingly, as you regularly review your personal cash statement, you will become more conscious of your spending decisions in real time, not just when you review your statement.

Enhanced Budgeting

A personal cash flow statement can help you create a more detailed and practical budget by identifying exactly where your money is going. And with a comprehensive cash flow statement, you can easily spot areas where you may need to cut back on your expenses or allocate more funds.

For instance, let’s say you notice that your grocery bill has increased significantly over the last six months. You can delve deeper to understand why and adjust your budget or behavior accordingly. You may decide to allocate more funds to your grocery budget for the following months or find ways to reduce grocery expenses. This real-time feedback loop is invaluable for effective budget management.

Set Achievable Financial Goals

By highlighting your disposable income or the money left over after all cash outflows have been accounted for, a personal cash flow statement can help you set realistic financial goals, both short-term and long-term. This way, you’re not just aiming mindlessly but setting achievable targets.

For instance, if your cash flow statement reveals that you have $300 left each month after essential expenses, setting a goal to save $500 a month would be unrealistic and could leave you frustrated. On the other hand, a realistic goal based on your actual disposable income, such as saving 20% ($60) monthly, can improve your financial self-esteem and encourage you to maintain or improve your financial habits.

Evidently, setting achievable goals not only improves your financial self-esteem but also leads to a sense of accomplishment that motivates you to set and achieve more financial goals.

Effective Debt Management

Effective debt management is critical to eliminating liabilities within the shortest possible time to avoid unnecessary interest payments. A well-structured cash flow statement can reveal non-essential expenses you could cut back on or eliminate to free up funds to fast-track your debt repayment.

Consider this scenario: After creating a monthly cash flow statement, you notice spending $200 on gourmet coffee and $150 on streaming services. Making coffee at home and canceling a few subscriptions could free up $350 monthly or $4,200 annually!

When redirected to your credit card debt, this surplus can significantly reduce your outstanding balance and the interest you’d otherwise accrue, fast-tracking your path to being debt-free. Similar savings can be spotted in areas like dining out, unused gym memberships, or impulse online purchases.

Remember, staying disciplined with your repayment strategy is vital to managing and eliminating debt. Timely repayments free you from debt faster and improve your credit score, opening doors for better financial opportunities in the future.

Deeper Financial Analysis

The insights a personal cash flow statement provides are not limited to tracking income and expenses. By using your cash flow data, you can easily calculate key personal financial ratios. An example of these ratios is the debt-to-income ratio, calculated by dividing total monthly debt payments by total income.

Personal financial ratios are more than just numbers. Despite popular misconceptions, they are performance indicators that can help anyone gauge their financial health and make informed decisions. For example, lenders consider a debt-to-income ratio higher than 0.36 as a red flag. Your ratio exceeding this threshold may result in higher interest rates on loans or make it challenging to secure credit. In such a situation, it’s prudent, therefore, to reduce existing debt before attempting to take on additional debt.

By creating and regularly updating your cash flow statement, you can actively monitor these ratios, spot trends, and make adjustments to reach financial goals more effectively.

While a personal cash flow statement is invaluable for understanding your finances, it has limitations, which, when recognized, can lead to a more accurate interpretation of your data. Here are a few limitations to remember when analyzing a personal cash flow statement.

Doesn't Reflect Future Commitments

A cash flow statement primarily captures present transactions and doesn’t account for upcoming financial obligations like loan repayments or planned investments. For instance, if you’ve recently agreed to a car lease or plan to enroll in a long-term course next year, these commitments won’t appear in your current statement, potentially underestimating future expenses. You can neutralize this limitation by creating a forward-looking budget alongside your cash flow statement.

Doesn't Reflect Total Wealth

A cash flow statement won’t reflect the value of assets such as your home, car, investments, or savings, thus not fully representing your wealth. A balance sheet, on the other hand, provides a snapshot of your assets, liabilities, and net worth, offering a comprehensive view of your overall wealth. As such, it’s important to use your cash flow statement together with a balance sheet to get a complete picture of your current financial health.

Potential for Missed Expenditures

It’s easy to overlook some expenses, especially smaller or infrequent ones, which can make your cash flow statement inaccurate. One way to mitigate this limitation is by meticulously tracking all cash outflows, no matter how small. You can do this by using an expense tracking app, keeping all receipts, or reviewing bank statements.

Provide a Snapshot of a Specific Period

A personal cash flow statement only provides a snapshot of your cash inflows and outflows for a specific period, typically a month or a year. It does not reflect changes in your financial situation over time. For instance, if you faced a significant medical expense in January and then maintained a strict budget for the next few months, a cash flow statement for April might not reflect the financial strain you experienced at the start of the year. To track your financial progress, you need to regularly update and review your cash flow statement and compare it with previous periods.

Understanding your cash flow is essential for managing your finances effectively. A personal cash flow statement enables you to identify patterns, plan for the future, and make informed financial decisions. However, to get the most out of your personal cash flow statement, you need to be diligent in its creation and usage. Here are some pro tips for creating and using a personal cash flow statement effectively:

Record Everything

Record all inflows and outflows, no matter how small, to make your cash flow as accurate as possible. Even minor discrepancies can lead to an inaccurate picture of your financial health. For example, small expenses like daily coffee or occasional parking fees are often overlooked. However, a $5 daily coffee adds up to $150 monthly and $1,825 yearly. Assuming your yearly expenses amount to $36,000, you underreport your expenses by ~5% every year.

Use Accurate Time Frames

Make sure the time frame for your cash flow statement matches the time frame for your budget and financial goals. A monthly cash flow statement is appropriate for most people because many expenses and income sources occur on a monthly basis. However, if you have significant irregular expenses or variable income, you may need to review and update your cash flow statement more frequently, such as weekly or bi-weekly.

Be Specific

When noting your expenses, avoid grouping them into overly broad categories to understand your spending patterns better. For example, instead of vaguely listing $150 for “utilities,” you could break it down: $50 for “electricity,” $40 for “water,” $30 for “internet,” and $30 for “gas.” Such granularity can reveal surprising spending habits, like unusually high water cost that prompts leak checks or water conservation efforts.

However, it’s also crucial not to overwhelm your cash flow statement with excessive detail. Excessive details can clutter your statement, making it harder to identify overall trends or patterns quickly. For example, instead of listing “Netflix,” “Hulu,” and “Disney+” separately, group them under “Streaming Services”. The goal is to find a categorization balance that ensures your cash flow statement remains streamlined yet insightful, setting the stage for well-informed financial decisions.

Distinguish Between Essential and Non-Essential Expenses

Distinguishing between essential and non-essential expenses helps you identify areas to cut costs. Essential expenses are the basic costs incurred to maintain a safe and healthy living standard; they cover the fundamental needs required to live and work in modern society. Such expenses include groceries, housing, healthcare, utilities, and transportation. On the other hand, non-essential expenses are costs that enhance your life but aren’t vital for your basic survival. Dining out, vacations, luxury shopping, streaming services, etc., are non-essential expenses.

Note that essential expenses can differ based on individual circumstances and lifestyles. For example, if you work from home, high-speed internet becomes a necessity, whereas someone without remote work might view it as a luxury. It’s essential to recognize that what’s necessary for one person might be a luxury for another. Tailor your cash flow statement to reflect your unique needs and priorities.

Plan for Emergencies

Always ensure that you maintain a financial buffer for emergencies and unexpected expenses. Aim to set aside at least 3-6 months’ worth of living expenses in an easily accessible account. This duration is often optimal as it provides adequate coverage for scenarios like unexpected job losses, sudden medical bills, or major home repairs.

Keep your emergency fund in a high-yield savings account, where your money remains readily accessible and earns interest. You might also consider diversifying your emergency fund by putting a portion in money market accounts or short-term certificates of deposit for potentially higher returns.

Review and Adjust Regularly

Your cash flow statement is a dynamic document that should be reviewed and updated regularly. Regular updates help you stay on top of your finances and make necessary adjustments promptly. Update your cash flow statement as regularly as possible. Monthly updates are standard, but you may want to update more infrequently if your inflows and outflows rarely change.

Identify Areas for Cost Reduction

Make it a habit to regularly review your cash flow statement to pinpoint areas where you can trim expenses. If, for instance, you notice a significant portion of your money goes into dining out, consider cooking at home more often to reduce costs. Similarly, evaluate monthly subscriptions to see if there are any you no longer utilize, or consider cheaper alternatives to recurring expenses, ensuring every dollar is spent wisely.

Identify Opportunities to Increase Income

Review your cash flow statement regularly to identify opportunities for increasing your income. This could include asking for a raise, starting a side hustle, or investing in income-generating assets. For instance, if you have a skill like graphic design, you could begin freelancing and taking on small projects in your free time. Alternatively, investing in income-generating assets like dividend stocks or real estate can also increase your income.

Set Realistic Goals

Setting achievable goals for savings, investments, and debt repayment is crucial. For example, if your monthly income is $3,000, setting a goal to save $1,500 monthly may be unrealistic after accounting for all other expenses. Always consider all your essential expenses before setting aside a savings goal.

Use Technology

Using a financial tracking app or software can help you keep track of expenses and minimize omissions. Many apps like Mint, YNAB, Spendee, and PocketGuard offer features that can help you track your expenses, set budgets, and monitor your investments. Look for an app that allows you to categorize your expenses, set alerts for overspending, and provide a visual representation of your financial health.

Pair With Balance Sheet

Your personal cash flow statement is one part of your financial profile. Pairing it with a balance sheet provides more accurate insights into your financial status, allowing you to identify areas of vulnerability, such as looming debts, and opportunities, like potential investments.

By tracking your monthly net cash flow statement from the cash flow statement and your net worth from the balance sheet, you can strategically plan for future investments, debt repayments, and savings. For instance, if your cash flow statement shows a consistent surplus each month, but your balance sheet reveals high-interest debt, it might be wise to allocate some surplus towards that debt reduction.

Feel free to seek assistance from a financial advisor or planner if creating and managing your cash flow statement seems overwhelming. While a financial advisor can be helpful for anyone, it is especially beneficial for those with more complex financial situations, such as multiple income streams, significant debts, or an extensive investment portfolio. For example, if you have $20,000 in credit card debt, a financial planner can help you develop a plan to pay it off within a realistic timeframe.

Meet Sarah, a 24-year-old recent graduate who has just started her first job as a graphic designer in a reputable advertising agency. Now, with a steady income and eager to start on the right financial footing, she has decided to create a personal balance sheet to gain insight into her financial health.

Sarah has some student loans, a personal loan she took for a family emergency, has been using a credit card for daily expenses, and is living in a rented apartment. Although she had saved some money from part-time jobs during college, she’s unsure how her assets measure up against her debts. She aims to clear her debts, invest more, and contribute more to her retirement fund.

After reading this comprehensive guide on personal financial statements, Sarah decided to create a personal balance sheet to understand her financial status clearly and develop a financial plan.

Creating the Personal Balance Sheet

Sarah sets aside a weekend to organize her financial documents, online accounts, and other financial information to compile a comprehensive list of her assets and liabilities. She then begins by listing all her assets and liabilities meticulously.

LIQUID ASSETS

• Checking Account: $3,200
• Savings Account: $5,500
• Total Liquid Assets: $9,000

NON-LIQUID ASSETS

• Retirement Account (401k): $1,000 (from her new job)
• Investment Portfolio (a diversified set of index funds): $2,700 
• Car: $10,000 (current market value)
• Total Non-Liquid Assets: $13,700
• Total Assets: $22,700

LIABILITIES

SHORT-TERM LIABILITIES

• Credit Card Debt (20.93% annual percentage rate): $2,500
• Utility Bills (monthly): $200
• Personal Loan from a Friend (to be repaid within a year): $1,000
• Total Short-Term Liabilities: $3,700

LONG-TERM LIABILITIES

• Student Loans (10-year loan term; 6% fixed interest rate): $25,000
• Car Loan (7-year loan term; 9% annual percentage rate): $8,000
• Total Long-Term Liabilities = $33,000
• Total Liabilities = $36,700
• Net Worth = -$14,000

Interpretation and Action

Upon analyzing her Personal Balance Sheet, Sarah finds herself with a negative net worth, largely because of her student and car loans. She decides to take the following actions:

• Credit Card Payoff: Prioritize paying off her credit card debt first, as it has the highest interest rate (20.93%), and then pay off the car loan next, since it has the second-highest interest rate (9%). To achieve this, she decided to allocate 60% more of her monthly disposable income towards paying off the credit card debt. 
• Student Loan: Since her student loan has a low single-digit interest rate, Sarah figures there’s no pressing need to rush clearing her student loan. Maintaining her current monthly payment is more financially prudent, especially since student loan interest payments are tax deductible. However, she also knows paying off the loan earlier can save her some interest payments. For that reason, she plans to increase her student loan payments if she gets a chance to do so.
• Emergency Savings: Sarah understands the importance of having an emergency fund. Hence, she decides to save 20% of her disposable income each month until she accumulates a year’s worth of living expenses.
• Retirement Planning: Continue contributing to her 401k to take advantage of her employer’s match and the power of compound interest. 
• Investing: Sarah decides to postpone increasing her investment allocation until she has paid off her credit card debt. She understands that it will be challenging to generate real investment returns, seeing as the interest rate on credit card debt exceeds her portfolio’s annualized return.
• Cash Flow Statement: Create a detailed personal cash flow statement to monitor her income and expenses. Doing so will help her identify expenses she can cut back on and allocate more funds toward her debt repayment and savings goals.

Benefits Sarah Gained from Creating a Personal Balance Sheet

• Increased Financial Awareness: By creating her personal balance sheet, Sarah became more aware of her financial situation, which helped her to make informed financial decisions. She decided to prioritize paying off her credit card debt, postpone increasing her investment allocation until her high-interest debts were paid off, and start building an emergency fund. This heightened awareness also reduced her anxiety about her finances and increased her confidence in achieving her financial goals.
• Snapshot of Financial Health: The balance sheet provided Sarah with an overall view of her financial status, revealing that her liabilities significantly exceeded her assets. Her negative net worth was a clear signal that she needed to focus on debt reduction and savings. Identifying this financial weakness allowed her to create a targeted plan to improve her financial health.
• Financial Progress Tracking: By regularly updating her personal balance sheet, Sarah can monitor her wealth over time and see if she is progressing toward her financial goals. For example, as she pays off her debts, she will see a reduction in her liabilities and an increase in her net worth.
• Financial Planning: Creating the personal balance sheet enabled Sarah to begin creating a financial plan. She was able to set realistic goals for saving and debt repayment, giving her a structured path forward. 
• Advanced Financial Analytics: Creating a personal balance sheet made it easier for Sarah to calculate and track important personal financial ratios. For example, she could calculate her debt-to-asset ratio and use this information to make informed decisions about debt repayment and borrowing.

Limitations Sarah Overcame

• Doesn’t Show Cash Flow: While the personal balance sheet provided a snapshot of her financial situation, it did not show her cash flow. Recognizing this limitation, Sarah decided to create a detailed personal cash flow statement to monitor her income and expenses. Doing so would help her identify areas where she could cut back and allocate more funds toward her debt repayment and savings goals.
• Fluctuating Values: Sarah understood that the values of assets and liabilities could fluctuate over time. To mitigate this limitation, she decided to update her balance sheet every quarter to ensure that it always reflected her current financial situation. 
• Dependency on Accurate Data: Any oversights or inaccuracies could paint an incomplete picture of Sarah’s financial status, potentially leading her to make ill-informed decisions. To overcome this limitation, she meticulously included every asset and liability, no matter how small, and validated the values by checking her bank statements, credit card statements, investment account statements, and other financial records. Additionally, she used financial management apps to automatically pull and consolidate data, further enhancing the accuracy of her balance sheet.
• Subjective Asset Valuation: Knowing that misvaluing her assets can make her balance sheet inaccurate, Sarah used the current market value for her car and checked the most recent statements for her savings and investment accounts.

Pro Tips Sarah Followed

• Regular Updates: Sarah set a reminder to update her Personal Balance Sheet every quarter to track her financial growth and to recalibrate her plans as needed.
• Be Thorough: Sarah included all her assets and liabilities, no matter how small, to ensure her balance sheet was comprehensive.
• Accurate Valuation: As mentioned earlier, Sarah made sure to use the current market value for her car and checked the most recent statements for her savings and investment accounts.

Creating a personal balance sheet was a transformative experience for Sarah. The exercise gave her the information and motivation she needed to take control of her financial future. It provided her with a clear and comprehensive view of her financial situation, enabling her to create a targeted plan to improve her financial health.

Before creating her balance sheet, Sarah often felt overwhelmed by the abstract notion of “net worth” and “financial health.” But after this exercise, these abstract worries solidified into tangible numbers and action points.

Though she started with a negative net worth, Sarah now has a roadmap for eliminating debts and increasing her assets. With a clear roadmap in place, she is now confident in her ability to manage her finances effectively and work towards a secure financial future. This is all thanks to the simple yet enlightening exercise of creating and maintaining her personal balance sheet.

Having already evaluated her net worth via her Personal Balance Sheet, Sarah recognized the importance of tracking her monthly income and expenses. She knows that understanding her cash flows will help her stay on course with her financial goals.

As a recent graduate thrust into the real world with her first job, Sarah was determined not to succumb to the all-too-familiar pitfalls of unchecked spending and minimal savings. Earning a consistent paycheck ($4,500) and living by herself means she has inflows and outflows to monitor closely. And with goals like repaying debts, building an emergency fund, and future investments in mind, it became clear to Sarah that she needed a comprehensive tool to keep tabs on her money.

Creating the Personal Cash Flow Statement

Taking another weekend, Sarah organizes her bank statements, pay stubs, bills, expense-tracking app printouts, and receipts she has accumulated over the past month to compile an accurate cash flow statement. She then begins listing down all sources of cash inflow and outflow.

CASH INFLOWS

• Base Salary from Advertising Agency: $3,420 (after a 24% tax deduction)

FREELANCE INCOME

• Graphic Design Projects: $996

INVESTMENT RETURNS

• Dividends from Index Funds: $35

NON-INVESTMENT PASSIVE INCOME

• Affiliate Marketing from Personal Design Blog: $236
• Ad Revenue from Personal Design Blog: $112
• Sale of Old Laptop: $300
• Total Cash Inflows: $5,099

CASH OUTFLOWS

ESSENTIAL EXPENSES

• Rent: $1,200
• Groceries: $300
• Utilities: $200 (including electricity, water, and internet)
• Gas (for transportation): $120
• Health Insurance (deducted from her salary): $120
• Car Insurance: $90
• Personal Care (haircuts, toiletries): $60
• Public Transportation: $50
• Total Essential Expenses: $2,140

NON-ESSENTIAL EXPENSES

• Dining Out: $250
• Miscellaneous Purchases: $100
• Gym Membership: $50
• Streaming Services (Netflix, Spotify): $25
• Total Non-Essential Expenses: $475

DEBT PAYMENTS

• Student Loan Repayment: $300
• Car Loan Payment: $200
• Credit Card Minimum Payment: $100
• Personal Loan from a Friend: $100
• Total Debt Payments: $700
• Savings Account Contribution: $500
• 401k Contribution: $225 (5% of her gross salary)
• Total Savings: $775
• Investment into Index Funds: $200
• Total Investments: $200
• Total Cash Outflows: $4,140
• Net Cash Flow: $959

Upon completing her personal cash flow statement, Sarah is relieved to see a positive net cash flow of $959. This positive net cash flow means she’s living within her means and has a surplus after paying all monthly obligations.

However, she recognized that $300 of the surplus was from a one-time sale of her old laptop—an irregular form of income. This meant that her consistent net cash flow was actually $659—give or take a couple of dollars due to the unpredictable nature of her non-investment passive income.

With this in mind, she decided to further allocate her net cash flow towards:

• Caution with Irregular Income: She decided not to rely on her asset sale for recurring monthly expenses. Instead, she’d treat such irregular income as a bonus. 
• Debt Acceleration: In a bid to reduce high-interest liabilities faster, Sarah allocated an additional $395.40 (or 60% of her monthly disposable income) from her regular surplus towards her credit card debt, increasing the monthly payments to $495.40. By so doing, she will pay off the debt within five months, as long as she doesn’t incur any more credit card debt.
• Emergency Fund Boost: After accounting for the credit card payment, she decides to save an extra $131.80 (20% of $659) from her regular surplus to her emergency fund, bolstering her financial safety net. 
• Personal Loan Payoff Strategy: Remembering the personal loan she took for a family emergency, she committed to allocating 20% of her monthly disposable income to repay it faster. This would amount to $131.80 (20% of $659) every month, in addition to the $100 she currently pays, taking the total monthly payment to $231.80. Sticking to this payment strategy will help her pay off the loan within five months, as opposed to the initial ten.
• Non-Essential Expenditures Review: Sarah observed that her dining out expenses were relatively high. So, she decided to reduce it by $100 (40%) and divert that amount towards her student loan repayment. Doing so will help her pay off the loan three years earlier and save $2,868 in interest payments.
• Car Loan: Sarah realized that by paying $200 monthly, she was already on track to pay off her car loan within four years, three years earlier than her loan term, saving $1,270 in potential interest payments.
• Passive Income : Seeing the success of her personal design blog, Sarah considered investing more time to increase her advertising and affiliate marketing income.

Benefits Sarah Gained From Creating a Personal Cash Flow Statement

• Enhanced Financial Awareness: Sarah better understood her financial status after creating her cash flow statement. This exercise helped her spot patterns, such as her monthly takeout habit, making her reconsider her spending decisions.
• Precise Goal Setting: Sarah found it easier to set financial targets once she knew her disposable income. This ensured she wasn’t setting herself up for failure but creating realistic and achievable financial objectives.
• Effective Debt Management: Completing the cash flow statement, Sarah was better poised to manage her multiple debts. Recognizing the prudence of paying off high-interest debts first, she drafted a strategic repayment plan, saving herself from additional interest accumulation.
• Temporary Snapshot: Sarah understands that the cash flow statement provides data for a specific period. Thus, she plans to review and update hers regularly to monitor financial changes over time.
• Wealth Indication: Aware that the cash flow statement doesn’t reflect total wealth, Sarah complements it with a personal balance sheet to gauge her overall financial health.
• Expenditure Accuracy: Sarah addresses the challenge of overlooked expenses by meticulously tracking every penny, often using financial tracking apps for accuracy.
• Regular Review: Sarah plans to diligently review her cash flow statement every month to ensure it’s updated and reflective of her current financial state. 
• Digital Assistance: Sarah uses expense-tracking apps to automatically categorize and track her inflows and outflows to streamline the process.
• Emergency Preparedness: Sarah maintains an emergency fund, understanding the unpredictability of life events.

Creating a personal cash flow statement was yet another financial eye-opener for Sarah. Just as the personal balance sheet had given her insight into her net worth, the cash flow statement offered her a clear view of her monthly financial activities. She could see where her money came from and where it was going, ensuring she wasn’t merely flying blind when managing her monthly expenses and income.

Sarah’s positive net cash flow is encouraging, and her decisions to accelerate debt repayment and consistently increase her savings demonstrate both proactiveness and foresight. Armed with the insights from her cash flow statement, she is now even more committed to fortifying her financial resilience, ensuring she is not just living for the present but is also well-prepared for the future.

Want a hassle-free way to monitor your finances? Download our free personal financial statement template. Easy to use and fully customizable—it’s everything you need to keep track of your assets, liabilities, and cash movements.

DOWNLOAD: Personal Balance Sheet and Cash Flow Statement Template

How to Use the Template

The template is a view-only file and can’t be edited. To use, click on “File” and then select “Make a copy.” This will get you a copy of the template that can be modified.

Don’t request edit access, please.

In today’s complex economy, tools like a personal balance sheet and a cash flow statement aren’t just nice to have—they’re essential for understanding and navigating your finances.

Think of the balance sheet as a still photo, capturing your assets and liabilities in one snapshot. It allows you to calculate your net worth and can highlight areas for improvement. In contrast, the cash flow statement is like a movie, illustrating the dynamic movement of your funds and providing insights into your liquidity and spending habits.

Individually, these statements offer valuable insights, such as revealing if you’re splurging too much on non-essentials or if debts are becoming unmanageable. Yet, when combined, they paint a comprehensive picture of your financial standing and habits. This dual perspective ensures you know your financial status and how your habits shape it.

As illustrated by the case studies, creating these financial statements is simple, especially with the templates provided in this guide. These templates simplify the process of creating these statements with their auto-calculating fields and intuitive categories. They guide you through the process, minimizing errors. Remember, keeping these statements updated is vital to ensuring you’re on track with your financial goals, be it budgeting, retirement planning, or merely gauging your fiscal health.

Feel free to work with a financial planner or advisor if you find it challenging to decipher and leverage insights from your financial statements. Not only can they assist you in understanding these statements, but they can also offer personalized strategies tailored to your unique financial situation. Beyond helping you interpret these statements, they can also advise on investments, tax planning, and other aspects of financial management that might be outside your comfort zone.

By understanding, creating, and maintaining these personal financial statements, you’ll have the tools to navigate your financial journey, align your financial habits with your goals, and build a secure financial future.

Remember, maintaining and reviewing these statements regularly is as important as their initial creation. As your financial situation evolves—like with a new job, added expenses, or changes in investments—your statements should reflect those shifts to offer accurate insights. So, watch those numbers, make wise choices, and remember—you’ve got this!

About the Author

Abolade Akinfenwa is a multi-certified finance professional. He’s certified as a Financial Modeling & Valuation Analyst (FMVA)®, Capital Markets & Securities Analyst (CMSA)®, Commercial Banking & Credit Analyst (CBCA)®, Financial Planning & Wealth Management Professional (FPWM)™, and FinTech Industry Professional (FTIP)™. With over three years of experience as a Financial Writer, Abolade specializes in helping finance professionals build authority and generate qualified leads for their services. Interested in collaborating or seeking insights? Connect with Abolade via LinkedIn or Twitter , or email him at [email protected] .

Recommended reading

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Sample Personal Statement Accounting and Finance

by Talha Omer, MBA, M.Eng., Harvard & Cornell Grad

In personal statement samples by field.

The following personal statement is written by an applicant who got accepted to several top accounting and finance programs. Variations of this PS got accepted at the University of Michigan, Vanderbilt, and Indiana University. Read this personal statement to understand what a top essay in Accounting and Finance should look like.

Example Personal Statement Accounting and Finance

I have never made popular choices, whether academic or professional. Where high academic achievement irrefutably means pursuing a career in Medicine or STEM, I opted for a career in management. I was free to choose a path for myself, owing to my performance during an extensive pre-induction professional training program. Fortunately, I picked a path that everyone believed was insignificant.

My decision to move to a new city to pursue my path did not receive encouragement. Making my own decisions has given me the freedom to dream and make it a reality. It has strengthened my belief that I am the only one who can bring a difference for myself and those around me. Brazil’s institutions may seem frozen, yet, at the grassroots, Brazil is in perpetual motion with ceaseless creativity. To accelerate this motion, we need to bring better and more affordable solutions; I plan to do that.

Growing up in Brazil, I have constantly questioned why we are still not growing economically despite having abundant resources. I frequently discussed the economic factors affecting us with my father, leading me to work at local NGOs and attend voluntary programs. My interest intensified when I discovered during these experiences that the unequal distribution of resources was a major cause of our economic constriction.

Moreover, our medical, engineering and academic professionals would not work in rural areas due to a lack of facilities, further debilitating the imbalance. It made me realize that we could only reap the benefits of our efforts if there were a proportionate distribution of resources. Realizing how effective mobilization of resources can aid in eradicating social ills, I developed an interest in management. This equipped me with technical knowledge and provided room for opinion building.

Pursuing this path, I joined the leading undergraduate institution in the country. The zeal with which I made this decision led me to graduate summa cum laude. While studying, I taught communication skills to undergraduate business students from rural areas. Meeting these students compelled me to get involved even though I lacked formal teaching training. Through empathy and friendly get-togethers, I was able to help these students conveniently traverse in English. With this experience, I understood that my time and energy had been well spent and that as an agent of change, one does not necessarily need to be exceptional; instead, one requires creativity, patience, and emotional intelligence.

After graduation, I followed through with my goal of facilitating change by joining the banking sector as an accounting and finance trainee. By working in Brazil’s most vital financial sector, I was exposed to diversified experiences, from being as simple as issuing customer chequebooks to designing accounting and credit proposals to the tune of USD 1.2 billion. Furthermore, while working on individual projects, I developed an in-depth understanding of international accounting rules that regulated trade transactions; the learning opportunities were immense.

Two and a half years of experience in the finance sector brought me to work for the country’s central bank. The anxiety that accompanied moving away from home for the first time was overwhelmed by my professional and personal growth. Nine months of extensive training and on-the-job assignments exposed me to interminable learning opportunities. However, my real gain has been in the form of self-improvement and growth that accompanied my first experience living independently. Leaving the protective living that I enjoyed with my family is challenging, but it has developed and strengthened my capabilities of taking and owning my decisions. Above all, knowing that my family is not always around to guide me has instilled in me a greater sense of responsibility.

During the two a half years of experience in accounting and finance, I observed the financial exclusion experienced by some important yet financially constrained sectors of the economy. This exposure motivated me to join the Development Finance Department upon my appointment to the country’s central bank. Moreover, most of the firms operating in any country of the world are either small or medium enterprises. Thus, providing an enabling environment to such enterprises is significant for economic growth and employment generation.

In Brazil also, 90 percent of the enterprises are small and medium-sized, and lack of access to formal sources of finance is a significant impediment to these enterprises’ growth. Therefore, a huge room for improvement is available concerning the development of policy framework and market infrastructure for the financial inclusion of this sector. As a part of the central bank, I have been allowed to intervene in a system that is not effectively performing its role of financial intermediation. Innovation in financial products, development of accounting and risk mitigation strategies are requirements to alleviate this segment’s financial exclusion.

By broadening my exposure and enhancing my knowledge, I aim to equip myself better to address the shortcomings of one of the critical segments of the economy.

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100+ Grad School Personal Statement Examples

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• Finance Personal Statement Examples

Here are two finance personal statement examples from some of the best students in undergraduate and postgraduate programmes. Both examples you can use as inspiration and motivation to write your own personal statement for university . 

Finance Personal Statement

Ever since I discovered my passion for the finance industry at a young age, I have been determined to pursue a career as a financial consultant and advisor. It is this unwavering ambition that has led me to apply for the MSc course in Finance at the esteemed London School of Economics and Political Science (LSE). I firmly believe that this course will provide me with the necessary tools and knowledge to achieve my career goals by expanding my understanding of financial products, the intricate workings of financial markets, and investment banking.

The reputation of LSE as a university of academic excellence is one of the key reasons for my decision to apply. I am aware of the university’s ability to equip students with critical analysis skills that are essential for becoming leaders in their chosen sectors. Moreover, being located in the heart of London provides unparalleled opportunities for networking and professional development in the world of business and finance. The course’s comprehensive approach, which strikes a balance between theoretical and practical modules, is also highly appealing to me.

My educational background in accounting has laid a solid foundation for my advanced studies in finance. Through my coursework in accounting, I have developed strong numerical skills and gained practical experience in management accounting and reporting roles within financial firms. It was during my studies that I discovered a particular interest in Strategic Financial Management, where I was introduced to financial products such as equities, derivatives, fixed income, and bonds, along with their significance in financial markets. Building on this knowledge, I have become a qualified accountant and have gained valuable work experience as an Associate at Deloitte, where I am part of the project management team, responsible for decision support. This role has honed my ability to work under pressure and within tight time constraints, allowing me to meet urgent and conflicting deadlines.

To stay up-to-date with the dynamic financial market, I avidly follow financial news through subscriptions to reputable media platforms such as the Financial Times, the Economist, and Bloomberg. Additionally, I engage in various hobbies such as travelling, watching movies and documentaries, and reading to broaden my knowledge and stay informed about current affairs. As a sports enthusiast, I follow tennis, football, boxing, and Formula One racing. These diverse interests have cultivated qualities such as ambition, intuition, focus, and self-discipline, which drive me to excel in any endeavour. I value the input and opinions of others, making me an effective team player, while also possessing the independence and initiative to work autonomously. I firmly believe that these qualities will contribute to my success as a finance analyst and enable me to excel academically.

Looking toward the future, I aspire to establish a reputable financial consulting firm in my home country, Nigeria. This firm would provide a range of financial services to both companies and public institutions. I recognise that achieving this goal will require years of experience, cultivating the right connections, and personal determination. Pursuing an MSc in Finance from LSE will better equip me to manage corporate, strategic, and financial opportunities, while also providing the opportunity to learn from talented professors and compete with exceptional graduates. I am convinced that this course is a crucial step toward realizing my long-term aspirations.

The increasingly evident impact of financial risk on our world has captivated my interest like never before. The interplay between the financial sector, government, and the general public dominates news stories, emphasizing the significance of understanding the industry. With my passion for finance nurtured from an early age, I have dedicated myself to attaining a comprehensive understanding of both the theoretical and practical aspects of global finance through high-level studies and extensive work experience in diverse industrial and international contexts.

Currently, in my fourth year of a degree in Finance, Risk, and Investment at Caledonian University, I have developed a strong foundation of knowledge in the field. Moreover, I have delved deeper into specific areas

Finance Personal Statement Example

Since my early years, extensive international travel has shaped my perspective on the world, particularly the stark economic contrasts between the ‘Third World’ and the ‘Western World.’ Having the privilege of experiencing different cultures and economies through my parents, who have lived in Africa, Europe, and the USA, I have developed a deep curiosity about the mechanisms that drive global economies. This curiosity has led me to pursue Economics at A Level, as I believe it is at the core of world discussions and can provide a comprehensive understanding of current news articles and their correlation to the subject.

Through my readings, such as Tim Harford’s ‘The Undercover Economist,’ I have come to appreciate the analogy that economics is like engineering, offering insights into how things work and the consequences of changing them. I see economics as an intricate puzzle, requiring economists to integrate economic theories with government policies to solve complex economic problems. Attending conferences at prestigious institutions like the University of Warwick and Oxbridge has broadened my perspective on economics, with theories like Freakonomics intriguing me and sparking a desire to explore the unexpected links between seemingly unrelated phenomena.

My passion for economics is complemented by a strong affinity for mathematics , which has been nurtured since my childhood. From playing mental maths games to tackling complex problem-solving at A Level, I have developed analytical abilities that were put to the test during a taster day at Cass Business School. Through quick thinking and effective teamwork, I excelled in a trading shares simulation, resulting in my group being the most profitable. Furthermore, my participation in a business management enterprise day at the University of the West of England allowed me to showcase my skills, leading to the recognition of the ‘Best Business Idea.’

To gain practical experience in the finance sector, I sought work opportunities that would provide me with invaluable insights. My time at Britannia Building Society exposed me to the inner workings of retail banking, allowing me to shadow the branch manager, work closely with financial planning advisors, and handle transactions at the tills. This experience introduced me to financial assets, including options for investing in bonds, shares, and increasing savings. Additionally, working at Harrison’s Accountancy and Insolvency Agency gave me valuable knowledge about liquidations and insolvencies of businesses, further solidifying my interest in pursuing a career in finance.

Staying updated with current financial affairs is crucial to me, and I regularly read the economy sections of reputable sources such as the BBC website and The Economist. Subscribing to a weekly update from RBS provides me with topical developments in the financial markets. Alongside my commitment to academic and professional pursuits, I have also developed essential skills through my job at O2 Retail. This experience has sharpened my interpersonal skills and honed my ability to negotiate mutually beneficial deals for both customers and the company. As a captain of my football team, I have learned the value of leadership, motivation, and maintaining high team morale, skills that have translated into success in class debates and the trading shares simulation at Cass Business School.

During a recent trip to Switzerland, I had the opportunity to meet with the assistant vice president at Credit Suisse, who shared insights into exchange rate processes within a leading investment bank. These conversations further solidified my understanding of the close relationship between economics and the finance sector.

Through a comprehensive study of Level Economics and practical experiences, I have been able to bridge the gap between theory and real-world situations. Engaging with professionals in the field has deepened my appreciation for the vital connection between economics and finance. I am confident that pursuing a university education will equip me with the necessary knowledge and skills to navigate the dynamic and fast-paced world of financial markets.

My passion for finance and economics was sparked by the Lehman Brothers’ bankruptcy and the subsequent financial crisis when I was 21 years old. The events of that

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Accounting and Finance Personal Statement Examples

What is an accounting and finance personal statement?

Writing a personal statement for accounting and finance is a chance to sell yourself to the admissions tutors and show them why you would make a great candidate for an accounting course.

It’s the place on your UCAS form to describe your skills and strengths that will make you a valuable asset to a university, as well as your plans for a career in accounting.

You are allowed up to 4,000 characters to explain why you are applying for an accounting and finance degree, so you need to make sure your statement is as polished as possible to stand out from the crowd.

How do I write a good accounting and finance personal statement?

All successful accounting personal statements always use evidence to support their claims.

You need to convince admissions tutors that you’re a good match for the programme, so if you claim to be committed or inquisitive, then use examples from your life to back it up.

To write a great accounting personal statement you need to start early, brainstorm some ideas, and then begin your first draft.

This will then need to be carefully revised and edited before asking family and friends for feedback. Incorporate their comments and suggestions, and see how it is improved before asking them to look at it again.

Read through our accounting personal statement examples above to get an idea of what a good accounting and finance statement looks like.

Make sure you proofread your statement for grammar and spelling before sending it off, and if you feel you need a little extra help, take a look at our personal statement editing services .

What should I include in my accounting personal statement?

Many students choose to start their statement by picking a specific aspect of accounting and explaining why they enjoy it, e.g. trading simulation, quantitative techniques.

Admissions tutors want candidates that are as passionate about the subject as they are.

As well as your motivations for studying accounting and finance, think about your hobbies and extracurricular activities too. What skills have you learned from these and how will these help you in your accounting degree?

Talk about any work experience placements you have completed, e.g. shadowing an accountant or assisting a bookeeper. What did you take away from this experience? Do you feel you have all the necessary personal traits and qualities that make a good accounting student?

Your wider reading is also important, so it's worth mentioning anything you've read recently that you found interesting and why. Generally, admissions tutors like students who express their views and opinions, and use examples to back up their claims.

For more help and advice on what to write in your accounting personal statement, please see:

• Personal Statement Editing Services
• Personal Statement Tips From A Teacher
• Analysis Of A Personal Statement
• The 15th January UCAS Deadline: 4 Ways To Avoid Missing It
• Personal Statement FAQs
• Personal Statement Timeline
• 10 Top Personal Statement Writing Tips
• What To Do If You Miss The 15th January UCAS Deadline

How do I write my accounting personal statement introduction?

We recommend opening your accounting personal statement with the reasons why you are enthusiastic about this subject. You can do this either by picking out one or two aspects of the subject that particularly interest you, or if you have something relevant to share, you can relate an anecdote that explains why you've chosen to study accounting at university. For example, this applicant has chosen to talk about how a trip to Ghana made them want to pursue a career in accounting and finance:

"When thinking of how much power polymer notes hold, it was normal for a child like myself to ask, 'What is money?'. Looking back the answer was obvious. The literal meaning might be 'a medium of exchange' but I simply see it as 'to sustain'. I came to my interpretation of money through a trip to my motherland, Ghana.

For years, Ghana has experienced severe electricity supply challenges due to the economic crisis that led to the scarcity of consumers' payments. The frequent lack of electricity during my time there, impacted my daily activities. Although this was a short stay, having to come up with solutions everyday was frustrating, but it also made me think about the people who go through it every day.

This made me acknowledge the importance of business strategy and investment management. The ability of the Ghanaian government to come up with solutions for their monetary purposes is what inspired me to choose Accounting and Finance."

These opening paragraphs demonstrate that the candidate has thought about their career choice and explained why accounting and finance appeals to them so much. Remember that admissions tutors want to see students on their course that really want to be there, learn more about the subject in-depth and (hopefully) go on to taking up a job in their field.

Another candidate has chosen to open their accounting personal statement differently, by talking about their love of problem-solving and their work experience at a Chartered Accountants:

"I believe that within the financial world the importance of good fiscal decision-making is paramount, as well as the preparation of accounts and other related practices. The development of companies and monetary systems is a particular field of study that I find fascinating as it goes hand in hand with my love of problem-solving. This is a key element of accounting and allows clients to organise their finances in the most effective way. The chance for me to learn the way money is managed in a changing global economy, as well as in business, is why I want to study this degree course.

My desire to study accountancy was reinforced through my work experience at ***** *** Chartered Accountants. Whilst there I evaluated clients’ expenditures and incomes, I found this interesting as the need for attention to detail is key for successful modern accountancy. As well as this I reconciled multiple accounts and was shown how to calculate tax returns for a company or client over a set period of time. I found it really fascinating to be part of the workplace and it showed me how much breadth the field of accountancy has and this has only motivated me to work harder towards my goal of pursuing this career path."

However you decide to open your accounting personal statement, try to convey your passion for the subject, and focus on talking about the reasons why you've decided to study this subject for your degree.

How do I write a conclusion for my accounting personal statement?

One of the best ways to round off your statement is to talk about how you hope your accounting degree will help you grow your skills and knowledge, as well as achieving your plans for the future. For example, this candidate talks about how they've aspired to go to university from a young age, and how the challenges of a degree will help them solve economic problems in the future:

"Attending university has been an aspiration of mine from a young age, the thought of taking on new challenges and learning new things infatuates me with a burning desire to succeed. Long term, I plan to one day be able to construct solutions for the economic problems I read about and as a consequence become an asset to a global firm."

Other students choose to reiterate their interest in the subject, and why they would be a great candidate. For example, they might talk about how their personal qualities and/or experiences have equipped them with the right skills to pursue a degree in accounting.

Whatever you decide to conclude your statement with, try to make it memorable, and encourage the reader to think that you would be an asset to their department.

Further resources

• Finance and accounting personal statements - UCAS.com
• Accounting degree courses - UCAS.com
• Accountancy Undergraduate Degree Courses - WhatUni
• What can I do with an accounting and finance degree? - Prospects
• Accounting and Finance Degrees - Study In UK

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Accounting Personal Statement Advice

A personal statement is the final piece of the puzzle for your UCAS application. All universities require you to write a personal statement detailing your passion and interest for the course you're looking to study. An Accounting personal statement is designed to show course tutors why you would be suitable for their course. Your personal statement should be an in-depth look at the most important person on the course...you! With an Accounting and Finance personal statement, universities should see your love of the subject, your interest in the field and what makes you tick. When writing an Accounting and Finance personal statement, you should look at some previous Accounting personal statement examples to understand the tone for what you need to include in your own statement. No one is expecting War and Peace and no one is expecting the prose of Ernest Hemingway or the wit of Oscar Wilde, all a university wants to see is an honest and passionate representation of you. Sometimes in the case of an Accounting personal statement, less is more. Whatever you're going to be talking about or whatever experiences you have had that relate to the course, should be backed up with evidence. Talk about your love of finance. Have you done any work experience in this area? What prompted you to take up an interest in Accounting? It’s also important to make sure that any information you include is relevant. A story about how you scored the winning goal in your football team’s cup final isn’t really relevant in an Accounting degree, but if you speak about how it taught you the importance of discipline and hardwork, then you might just arouse some curiosity.

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• What is a cash flow statement? 

Components of a cash flow statement

What is negative cash flow.

• How to read a cash flow statement 

What to watch for in a cash flow statement

• The significance of cash flow 
• Cash flow vs. profit: Understanding the difference 
• The role of cash flow in assessing company health 
• Preparing a cash flow statement 

Cash flow statement FAQs

Understanding a cash flow statement.

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• A cash flow statement is one of three key documents used to determine a company's financial health.
• Cash flow statements provide details about all the cash coming into and exiting a company.
• A cash flow statement alone will not show all the necessary financial data to accurately analyze a company.

Companies with stocks that trade on public exchanges are required to periodically disclose a wide range of documents with detailed information about their operations. The cash flow statement is one of the most important to understand.

What is a cash flow statement? 

Definition and overview.

Cash flow statements are financial accounting statements that provide a detailed picture of the movement of money through a company — both what comes in and what goes out  — during a certain period of time. Using the information contained in a cash flow statement, business owners, shareholders, and potential investors can see how much cash a business is bringing and how much it's spending in a given period. In conjunction with other documents, cash flow statements can help you understand how financially healthy a company is.

Usually, cash flow is divided into three main categories: operations, investment, and financing. "Cash flow statements really just show business operations' impact to cash," says Dondrea Owens, CPA and founder of The Creative's CFO . 

A company's cash flow statement is one of three key reports that investors and other interested parties use to determine its financial performance. The others are the income statement and balance sheet. Together, they depict a company's finances. In the US, the Securities and Exchange Commission (SEC) requires publicly traded companies to provide them. 

Though all three documents deal with a company's money, they look at it from different angles. "We find that a lot of folks start with the balance sheet and the income statement," says Meredith Tucker , CPA at Kaufman Rossin . "And yet, I think the cash flow statement is one of the most helpful."

Cash flow provides important context to information that might not be apparent on a different financial statement. If a business makes a sale to a customer, that revenue often goes on an income statement and contributes to the company's overall profit or loss. However, if an invoice isn't due right away or the company extends a line of credit to the customer, the actual cash may not hit the company's bank account for months. This is why understanding cash flow is so important. 

In general, cash flow statements show a company's ability to operate. If an organization doesn't have enough cash to pay its expenses during a given period, it may not matter how many realized sales it has made. 

"From an investor standpoint, I want to know how a company is using the money I'm going to give them," Tucker explains. This is another reason cash flow statements can be important. They don't just show how much money was spent, but where it was spent.

"Are they diverting cash to repay debt? Are they distributing it out to shareholders? Are they losing money because they're extending more and more credit to their customers? Those are the kinds of things we want to see," Tucker says.

Knowing the key components of a cash flow statement is important for anyone who wants to understand the financial health of a company. Cash flow statements start with the amount of cash an organization had at the beginning of an accounting period and finish with the amount of cash the organization has at the end of the period. Everything in the middle details cash transactions as money entered and left the company. 

In general, this middle portion will be separated into three distinct categories: operating activities, investment activities, and financing activities. Within each category, line items show where money went or came from. 

Not every company will have the exact same line items on its cash flow statement, which Owens says is normal and not a cause for concern. Usually, money entering the company will be written as a numeral, and money exiting the company will include parentheses around the amount.

Operating activities

"The operating section is going to tell you about all the run-of-the-mill things that affect cash," Tucker says. These are the types of cash activities many people automatically associate with running a business: income from customers, wages to staff, inventory purchases, and income taxes, for example. 

In the statement above, you can see that within the last year, $975,000 was paid to the company from customers, and the organization spent a total of $563,050 on all operating expenses. In this example, the organization's operating costs come from inventory purchases, operating and administration expenses, wages, interest, and income taxes. The net cash flow from operations lines shows the difference between these two numbers, in this case, $411,950.

Investing activities

The net cash flow from the investing line shows the change in cash flow from all investing activities. In a business, investment activities may include the purchase or sale of physical assets, investment in securities, or the sale of securities. 

In the example above, the business only had two items that could be categorized as investment activities: selling property or equipment for $33,600 and purchasing property or equipment for $125,000. In this category, the company spent $91,400 more than it brought in, making that number its net cash flow from operations.

Financing activities

The final category on the balance sheet shows all cash transactions that had to do with financing activities. Things that would go in this category include activities that involve debt, equity, or dividends. In our example above, the company paid $38,000 and $52,000 to loan repayments and dividends, respectively. The organization didn't bring in any money through financing activities, so the net cash flow from financing is negative $90,000.

Negative cash flow appears when a company spends more than it generates in a certain period. A company may have an overall negative cash flow or any one of the sections may have negative cash flow, as the previous example shows in the investing and financing sections. 

"Negative cash flow isn't always bad," Owens says. "Companies do go through growth phases where they are spending money to make money." As long as the negative cash flow is planned, it's not an immediate red flag. 

Negative cash flow could also come down to a timing issue. "An accounting firm is a perfect example," Tucker explains. The busy season for accountants is often the beginning of the year when taxes are due, but most of those receivables won't be paid immediately. Though the business is generating revenue, the cash isn't in the account yet. 

On the other hand, if there is a pattern of cash flow issues, that could be a warning sign that the company isn't managing its money well. If you see a negative cash flow, it's worth looking into the reason to determine whether or not it's cause for concern.

How to read a cash flow statement 

Identifying cash sources and uses .

Businesses can obtain cash from various activities, ranging from selling their goods and services to selling securities at a profit. The most basic sources of cash, for example receiving income from customers, are outlined in the operating activities section of the cash flow statement. 

Companies can also generate cash flow by issuing equity or borrowing money. Both of these come with their own unique costs and benefits. Issuing equity does not come with the same obligations as taking on debt. If a company borrows money from a bank and is unable to pay that money back, the lending institution could go after the organization's assets in an attempt to recover the funds it lent out in the first place. 

Analyzing the company's liquidity and financial flexibility 

You can get a good sense of a company's liquidity by using the cash flow statement to determine working capital, funds that are used to ensure that a business can operate in the short-term. To determine working capital, subtract its liabilities from its assets. 

Assets are composed of cash and near-cash assets such as short-term liabilities, while liabilities would include money you owe to vendors and employees, as well as taxes you must pay. 

Though a cash flow statement can't tell you everything about a company's financial viability, there are some things to watch out for in them that can be particularly telling. "A green flag for me is if there is positive cash flow coming from operations," Owens says. "That's a good sign that the company is generating cash just from its operations."

On the flip side, he explains that negative cash flow from operations could be an indicator that something isn't going well with the company and might require additional research. 

Owens also recommends looking at the financing section, particularly to see if the business is bringing in most or all of its cash from loans or other sources of financing. "This isn't always a bad thing," she says. For example, it might be normal in a startup. But if most of the money is coming from financing, it's worth taking a second look, especially if the money will eventually need to be repaid. In general, the more cash that comes from operations, the better, Owens says. 

The significance of cash flow 

Cash flow vs. profit: understanding the difference .

Cash flow represents the money moving in and out of a business, whereas profit is what an organization has after subtracting all of its expenses from its revenue. 

Both of these terms can be either positive or negative. A company can have positive or negative cash flow, or alternatively, it can be generating positive profits or negative profits, which are generally described as losses. 

The role of cash flow in assessing company health 

Reviewing a company's cash flow will help an investor obtain a sense of how well-prepared that organization is to cover its financial liabilities. It can also help give investors greater insight into whether an organization is expanding or is in decline. If a company is repeatedly experiencing negative cash flow, this could hamper its ability to put money toward activities that would generate expansion, for example marketing, sales and public relations. 

Further, a company that keeps generating negative cash flow might have to lay off employees in order to generate positive cash flow. These cutbacks could in turn impact an organization's ability to function. 

Cash flow statement vs. income statement vs. balance sheet

Though cash flow statements include plenty of helpful information, they alone will not tell you a company's entire financial picture. They work best when analyzed in conjunction with the income statement, which shows its profit or loss, and balance sheet, which details assets and liabilities. At times, one statement may answer a question the other poses. For example, if you look at a company's balance sheet from one year to the next and see its cash assets went from $1 million to $500,00, at first glance, this could look alarming. But, if you follow up with the cash flow statement, you may see the money was used as part of an investing activity and went toward the purchase of another facility that could increase the company's profitability long-term. "Make sure you understand the story that these financial reports are presenting to you," Tucker says. "You really need the interplay to interpret the full story."

Preparing a cash flow statement 

Steps and key considerations .

The first step in preparing a cash flow statement is determining how much cash (and cash equivalents) a business has at the beginning of the period in question. This gives you the starting balance. 

The next step is to determine cash flow from operating activities. One way of assessing this, called the direct method, involves calculating the cash brought in through operations and subtracting the cash spent through such activities. This method involves accounting for all transactions that resulted in cashing going into (or out of) a business during the specified time frame. 

After that, determine cash flows associated with investing activities, which involves the purchase or sale of any assets like securities or real estate. 

Creating the next section of a cash flow statement involves calculating any cash that went in or out of a business as a result of financing, for example issuing equity or taking on debt. 

Once you have calculated the aforementioned amounts, you can use it to determine how much cash (and cash equivalents) a business has at the end of the period in question. You can subtract the starting cash flow from this amount to figure out how much cash a company made (or lost) during the period. 

A cash flow statement provides information on a company's financial health and liquidity, as well as its ability to function in the short-term. 

A cash flow statement includes actual cash transactions, while an income statement can list non-cash receipts. The balance sheet, alternatively, offers a summary of a company's assets and liabilities during a certain period. 

Negative cash flow can potentially indicate a company putting money toward its own expansion. However, sustained negative cash flow can signal that an organization is struggling financially. 

SEC regulations obligate publicly traded companies to produce cash flow statements on a quarterly and annual basis. 

Small businesses can most certainly benefit from creating cash flow statements, as these documents can help them keep track of how easily they can pay for their short-term obligations and make long-term strategic plans.

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First 7 jurors are chosen for Trump's hush money criminal trial, AP Explains

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The first seven jurors for Donald Trump ’s hush money trial have been chosen after lawyers grilled members of the jury pool about their social media posts, political views and personal lives. Eleven more people still need to be picked before opening statements begin as early as next week.

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Breaking news, ex-army financial counselor admits to defrauding grieving gold star families in life insurance scheme.

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A former financial counselor with the US Army has pleaded guilty to defrauding grieving Gold Star families out of millions of dollars worth of life insurance payments, the Department of Justice said Tuesday.

New Jersey resident Caz Craffy, 41, pleaded guilty to six counts of wire fraud and one count each of securities fraud, making false statements in a loan application, committing acts affecting a personal financial interest, and making false statements to a federal agency.

If found guilty he could spend 8 to 10 years in prison under recommended federal guidelines. He’s also agreed not to appeal a sentence up to that range and to make full restitution.

When a member of the armed forces dies during active duty their surviving beneficiary — a Gold Star family member — is entitled to a $100,000 payment and the servicemember’s life insurance up to $400,000.

From November 2017 to January 2023, Craffy was responsible for providing general financial education to Gold Star families but instead used his position to “target” these vulnerable families, court documents revealed.

“Nothing can undo the enormous loss that Gold Star families have suffered, but the Justice Department is committed to doing everything in our power to protect them from further harm,” Attorney General Merrick Garland said in a statement.

The 41-year-old was an employee of the Army working as a financial counselor with the Casualty Assistance Office and has also been a major in the Army Reserve.

He was prohibited from offering any personal opinions regarding the beneficiaries money and was “not permitted to participate personally in any government matter in which he had an outside financial interest in,” court filings read.

Craffy admitted that he’d encouraged Gold Star families to invest in accounts he managed in his outside employment with two separate financial investment firms. The families mistakenly believed this was with the authorization of the Army.

From May 2018 to November 2022, Craffy cheated the beneficiaries out of more than $9.9 million. 

He used the money for trades without the family’s authorization earning Craffy high commissions.

Gold Star family accounts lost more than $3.7 million, while Craffy earned more than $1.4 million in commissions taken from their accounts.

“Craffy disgraced his entrusted position to care for our nation’s military families when he allegedly took advantage of them during a vulnerable time of grief,” Acting Special Agent in Charge William S. Walker of Homeland Security Investigations (HSI) Newark said.

Craffy entered his plea before US District Judge Georgette Castner in Trenton, New Jersey and is scheduled to be sentenced on August 21.

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Former Michigan House leader and wife charged with misusing political funds

FILE - Michigan Speaker of the House Lee Chatfield bangs the gavel, April 24, 2020, in the House chambers in Lansing, Mich. Prosecutors plan to announce charges Tuesday, April 16, 2024, in an investigation of the former leader of the Michigan House, the attorney general’s office said. (Matthew Dae Smith/Lansing State Journal via AP, File)

Michigan Attorney General Dana Nessel talks about charging former House Speaker Lee Chatfield, Tuesday, April 16, 2024, in Lansing, Mich. Prosecutors charged Chatfield and his wife with financial crimes Tuesday, alleging they milked political accounts for personal travel, housing and other benefits while the Republican lawmaker was raising millions of dollars from his powerful post. (Al Goldis/Detroit News via AP)

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LANSING, Mich. (AP) — Prosecutors charged the former leader of the Michigan House and his wife with financial crimes Tuesday, alleging they milked political accounts for personal travel, housing and other benefits while the Republican lawmaker was raising millions of dollars from his powerful post.

Lee Chatfield misused various political funds, including his Peninsula Fund, which was not required to report the names of donors and served as an “unregulated slush fund,” Attorney General Dana Nessel said.

The operation was a family affair, as wife Stephanie Chatfield monitored her husband’s credit card balance and paid it off with cash from the Peninsula Fund, including $132,000 over a 14-month period, Nessel said.

In another example, Nessel said Lee Chatfield’s brother cashed a $5,000 check from a political fund in 2020 and returned $3,500 to the lawmaker ahead of a vacation, Nessel said.

Lee Chatfield’s various political funds took in more than $5 million over six years, including more than $2 million in 2020, which was his last year as speaker, the attorney general said.

“To call him, as many have, a prodigious fundraiser would not be an exaggeration,” Nessel said.

Lee Chatfield faces 13 charges, including conducting a criminal enterprise, which carries a maximum prison sentence of 20 years, and embezzlement.

Chatfield’s attorney, Mary Chartier, said she’ll fight the charges “each and every step of the way.”

“It took almost 2 1/2 years for the AG’s office to come up with charges. It’s going to be pretty flimsy if it took that long,” Chartier said.

Stephanie Chatfield was charged with embezzlement. A message seeking comment from her lawyer, Matt Newburg, was not immediately returned.

Nessel said there has been a proliferation of “dark money” political funds. She said the Peninsula Fund was organized under federal law as a tax-exempt “social welfare organization.”

“The Michigan Campaign Finance Act is effectively toothless, useless and utterly worthless as a deterrent to these crimes,” she said.

“The misuse of social welfare funds is not a new practice in Lansing. And while Lee Chatfield may have exploited the system a little bit more than others, no one political party alone has perverted or abused it,” she said.

Separately, there was a renewed call Tuesday to expand financial disclosure laws in Michigan.

“We won’t give up on seeking the type of anti-corruption laws that this state needs that most other states have,” Secretary of State Jocelyn Benson, a Democrat, said. “These charges really underscore the real necessity to more people in Lansing than ever before.”

The Chatfield investigation began in 2022 when his sister-in-law publicly said he had sexually assaulted her. He has denied the allegations and said they had a consensual affair. Investigators eventually expanded the case beyond those claims.

Nessel said there was insufficient evidence to charge Lee Chatfield based on Rebekah Chatfield’s allegations, though she praised her courage in stepping forward.

“Were it not for her we likely wouldn’t be here today,” the attorney general said.

Two people who were top aides to Lee Chatfield when he ran the House were charged last year with crimes, including embezzlement from nonprofit funds created for political purposes. Rob and Anne Minard have pleaded not guilty.

White reported from Detroit.