Your personal financial statements are the roadmaps that guide you from where you are today, to where you want to be tomorrow!
These statements provide fixed points of reference from which you can measure your progress over time.
There are two basic personal financial statements that everyone should prepare, or have a financial advisor prepare, at least once each year:
1. The Cash Flow Statement and
2. The Balance Sheet
This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control -- you know where you are going financially. It helps you to make wise decisions about all your financial matters.
The Cash Flow Statement:
Cash Flow is how you spend your money. A Cash Flow statement is an ongoing financial document which tracks sources of income, uses of income, and the difference between the two.
If you keep a budget, you are, in essence, keeping a running Cash Flow statement.
By tracking your Cash Flow on a monthly basis you will be better prepared to meet your various financial needs such as your:
Short Term Expenses, which are your day to day expenses and standard of living items such as food, transportation, childcare, and etc.
Recurring Expenses, which are your periodic payments for items such as periodic insurance premiums, tax payments, medical and dental expenses, and etc.
Financial Emergencies, which must include an emergency fund of a minimum six months salary, which will be able to provide cash for emergencies instead of going into debt.
Intermediate and Long Term Goals for systematic planning and saving, which will help you meet your financial objectives.
The Balance Sheet:
Your Balance Sheet is a snapshot of your personal net worth and portrays your Total Assets less your Total Liabilities that equal your Net Worth.
Is your current estimated value of your assets, which might include the following: cash in banks and money market accounts, cash surrender value of life insurance policies, pension accounts, real estate, and personal property. Add them up and you'll have a figure that represents your Total Assets at the moment.
Is the list of your liabilities, which might include the following: mortgages, bank loans, car loans, charge accounts, taxes owed, college loans, and etc. Add these up and you'll have a list of your Total Liabilities. Hopefully, it will be much less than your assets!
Your Net Worth:
Is your own Personal Net Worth, which is the difference between your total assets and your total liabilities.
As the progressive control you gain through your Cash Flow management turns into increased savings, your success will start reflecting in your increasing net worth.
The process of preparing your personal financial statements will bring you closer to controlling your personal finances and accumulating sufficient assets to meet all your objectives.