What Is a Personal Financial Statement?

What Is a Personal Financial Statement?

Let me tell you directly: a personal financial statement is a straightforward document that captures your financial position at a specific moment, based on what you own (assets) and what you owe (liabilities). It includes basic details like your name and address, plus a clear breakdown of your total assets and liabilities.

You can use this statement to monitor your financial goals and overall wealth. It's also practical when you're applying for credit, as it gives lenders a quick view of your situation.

Key Takeaways

Here's what you need to know: this statement lists all your assets and liabilities, whether you're single or part of a couple. Your net worth comes from subtracting liabilities from assets—a positive number means you have more assets than debts. Expect your net worth to change as asset values and debts shift over time. These statements are useful for tracking wealth, setting goals, and applying for credit. Income and expenses might appear here, but they're usually on a separate personal income statement.

Understanding the Personal Financial Statement

Financial statements exist for both companies and individuals, and the personal version is simpler than the corporate one. Both reveal financial health, but yours focuses on your personal net worth: assets minus liabilities. Think of it as what you'd have in cash if you sold everything and paid off all debts. If liabilities exceed assets, you have a negative net worth; otherwise, it's positive.

I recommend keeping your statement updated so you can see how your financial health evolves. It's a key tool if you're aiming to improve your situation or apply for a loan or mortgage. Knowing your standing helps you avoid pointless credit inquiries and rejections. For lenders, it provides a clear picture to decide on credit, and you might need to offer a personal guarantee or collateral.

Special Considerations

Your personal financial statement breaks down into assets and liabilities. Assets cover things like securities, checking or savings accounts, retirement balances, trading accounts, and real estate values. Liabilities include personal loans, credit cards, student loans, unpaid taxes, and mortgages—plus any jointly owned debts. If you're married, you can combine assets and liabilities into a joint statement.

When using the statement for credit or to show your full position, include income and expenses on a separate sheet or addendum called the personal income statement. This tracks all income sources and expenses, usually monthly or yearly.

Certain items don't belong in your statement: business assets and liabilities, unless you're personally responsible—like if you guarantee a business loan. Rented items are out because you don't own them, but if you own and rent out property, include its value as an asset. Personal property like furniture usually isn't listed since it's hard to sell for loan repayment, though valuable items like jewelry or antiques can be if appraised.

Important Notes

Remember, business liabilities only appear if you provide a personal guarantee to the creditor. Your credit report and history matter a lot for new credit—lenders have their own rules. Even with positive net worth, you could be denied if you've missed payments or have too many inquiries.

Example of a Personal Financial Statement

Consider River, who's tracking net worth toward retirement. They've been paying debts, saving, investing, and nearing home ownership, updating the statement yearly to measure progress.

River lists assets: $20,000 car, $200,000 house, $300,000 investments, $50,000 cash, and $20,000 in collectible stamps and art—totaling $590,000. Liabilities: $5,000 on the car, $50,000 on the house, and $10,000 from cosigning a daughter's loan—totaling $65,000. Subtracting gives a $525,000 net worth. River uses this mainly to monitor health but could apply it for credit.

What's Included on a Personal Income Statement?

This separate sheet covers income and expenses, expressed monthly or yearly. The difference is your net cash flow.

Am I Responsible for My Spouse's Debt If I Didn't Sign for It?

No, you're not liable unless you signed the agreement. In default, jointly held assets might be seized, but typically only in community property states—and even there, your income is protected.

Can I Have Too Many Credit Cards?

The number isn't the issue for your credit score or approvals. What counts is balances, payment timeliness, credit utilization, and overall debt in your net worth. Late payments will hurt your score.

The Bottom Line

In essence, a personal financial statement is a spreadsheet showing your financial position through assets and liabilities. Subtract liabilities from assets for net worth. It helps track goals and wealth, and it's useful for credit applications if solid. Income and expenses go on a separate personal income statement.