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Personal Financial Statements

Everyone should be familiar with their personal financial statements and what they mean. It’s a great example of how knowledge is power!

What are personal financial statements?

Personal financial statements address the finances of an individual, couple, or family rather than a business or entity and are usually simpler than corporate statements.

Data contained in personal financial statements outline the financial position of the named individual, couple, or family at any given time.

One Source Services, Inc. uses plain language to speak with clients about key numbers and what they mean while collaborating on financial improvement plans.

What do personal financial statements look like?

In it’s simplest form, a personal financial statement is broken down into assets and liabilities.

Assets are at the top of the statement and represent an individual’s resources with economic value and anticipation of some future benefit. For example, securities or funds in checking, savings, or retirement accounts, trading accounts, real estate, vehicles, artwork, antiques, and more.

Liabilities are in the middle of the statement and represent what an individual owes to someone else, their legal financial debts. Examples include personal loans, credit card balances, bills, mortgages, accrued expenses, and other obligations.

Finally, the statement is balanced out by net worth (assets minus liabilities) at the bottom of the statement.

What are personal financial statements for?

Although financial statements illustrate where an individual’s finances are right now, they can also identify and analyze trends.

An individual can keep track of how their financial health has improved or deteriorated by comparing personal financial statements over time.

Regular review allows people to identify issues and react before they become full-blown crises, and to monitor performance in regards to personal financial goals then respond as needed.

People who establish and stick to a financial review routine become more effective money managers. Periodically looking at a few key pieces of financial data will help someone stay on top of their finances even during economic downturns, preparing them for harder times.

Analyzing financial statements regularly can even locate extra cash! One Source Services, Inc. loves to show people how to find extra money.

Lenders often use personal financial statements when an individual applies for credit. For example, financial statements allow mortgage lenders to gain perspective into a potential homebuyer’s financial situation.

Personal financial statements may be needed as part of the documents for business plans and loan proposals, as well.

One Source Services, Inc. meets with clients year-round for individualized strategy sessions and personal financial statement preparation.

What is included in personal financial statements?

Personal financial statements should include all the assets and liabilities that relate to an individual’s, couple’s, or family’s finances.

All personal property counted as an asset must have significant value verifiable by appraisal. For example, jewelry, antiques, artwork, vehicles, or real estate.

What is NOT included in personal financial statements?

Personal household property may not be included because it cannot be sold to pay off a liability, such as a loan.

Leases and rentals are not included either, because there is no ownership. An individual may pay a monthly expense on the house they rent or the car they lease, but they don’t actually own these items and therefore they aren’t considered assets.

Furthermore, business-related assets and liabilities are not part of a personal financial statement.

How are personal financial statements prepared?

We start by gathering information about an individual’s assets and liabilities.

We prepare the document with the most recent information to show net worth at a specific point in time.

Professionals who refer to personal financial statements understand that the information is dynamic; it changes as individuals go about their lives (investment values fluctuate, people make purchases and pay bills).

We do our best to determine the reasonable value of assets. Should the lender want a more accurate value, they will request an appraisal.

It’s a good idea to run a complete credit report as part of the preparation, especially if the personal financial statement will be used for a business plan or loan. An in-depth report should provide details in addition to the FICO score.

Other documents that may be included in personal financial statements are:

The most recent cash balances in checking, savings, and brokerage accounts.

Income sources and a way to show it in the personal or business checking account.

IRA, 401k, and other retirement accounts.

A copy of the latest home mortgage statement showing the outstanding balance. In some cases, an appraisal may be required.

A copy of the latest car loan, boat loan, and any other debt that may show up on a credit report.

Contingent liabilities or debts shared jointly with someone else (a co-signed loan, for example).

Money owed from small claims judgments or other liens or judgments. Lenders can check public records for outstanding liabilities so disclose them.

Prior years’ unpaid federal, state, local, and even business payroll taxes the individual is personally responsible for.

Here’s a great SBA sample personal financial statement form.

Can personal financial statements be manipulated for a desired outcome?

What if an individual has negative net worth? Or, what if their net worth is greater than what they need to qualify for something?

DO NOT change the numbers, eliminate liabilities, or overstate assets under any circumstances; just leave it as it is.

Falsifying information can ultimately cause more damage than good. As stated on the SBA sample document linked above, “Knowingly making a false statement on this form is a violation of federal law.”

Honesty, accuracy, and completeness are the keys to creating useful personal financial statements.

Our personal financial statement specialists are available for training and to familiarize individuals with how to prepare, analyze, and best utilize the meaningful financial data contained in personal financial statements.

Don’t wait until you NEED a personal financial statement; start now!

Being prepared and informed all the time will greatly increase financial literacy, personal money management success, and the probability of getting the necessary credit when it’s needed.

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