Personal Financial Statement Why You Should Have One and How to Do It

By Tyler Wells

How much are you worth? Many self-made business people, famously including Robert Kiyosaki in his best-selling blockbuster “Rich Dad’s Prophecy,” emphasize the importance of creating a personal financial statement to help the entrepreneur track their income and change in net worth. At their simplest, personal financial statements include a statement of net worth and a cash-based statement of income. If you run your own business or you are an independent contractor you should already track income and expenses, perhaps on software such as Quicken or Mint because, at the minimum, you will need them to prepare your tax returns. By preparing your statement of net worth along with it you are giving yourself a powerful tool to help you understand if you’re getting richer or poorer and why. Read on for more information on why personal financial statements are such powerful tools, and how to prepare them.

Top 5 reasons for preparing your personal financial statements at least once a year:

  1. You can keep track of all your investments in one place. If you’re like me then you have a 401(k), the wife a 403(b), an IRA, and a few miscellaneous investments in comic books, antique chamber pots, and real estate in third world countries all on separate reports. I like to put their values all on one financial report each year to get an idea how my portfolio is performing as a whole. This way, if I am assassinated in the night by anti-capitalist accountant-haters, my wife will have a summary of our assets or, if I live, I can see if we need to do some diversification of the family portfolio into say, cocoa bean futures or works of art by minor Midwestern celebrities.
  2. In case someone wants to see them. For example, if you are applying for a loan with the Small Business Administration, if you are about to take on a business partner, or if you are engaged to be married and are about to ask your future father-in-law for permission then there are people who would be very interested in seeing what your resources are and how responsible you are in managing them!
  3. To examine where the money is coming from and where it is going. This is a hard look at the income side of the statement. I like to put my expenses into categories and compare how much I am spending in each category from one year to the next. That way, if I notice a big increase in a certain category, say “Wife’s Boyfriend,” I can nip that excess spending in the bud before it gets out of hand!
  4. It can be the basis for preparing the budget for the next year, or for making goals for the next year. My wife and I are saving to buy a piece of property in Costa Rica and we need the cash by August. Using this years budget we projected the cash we would normally have by then and then made some adjustments (she and I working harder and us all tightening the belt) to get to the necessary sum. If we didn’t have this information then we would be flying blind, with only a vague guess as to how much we could reasonably expect to have.
  5. Celebrity endorsements; Robert Kiyosaki, in his book Rich Dad’s Prophecy, says about personal financial statements “all through this book, I refer to financial greats such as Warren Buffett, America’s richest investor, Alan Greenspan, chairman of the powerful Federal Reserve Board, and Paul O’Neill, the secretary of the treasury, who all say basically the same thing my rich dad said to me. All of these financially smart men stress the importance of financial literacy and that financial literacy begins with a financial statement. None of these men said start with real estate, savings, a business, tax liens, stocks, day trading, options trading, or mutual funds, which is where most people start building their arks… and that is why so many arks cannot stand rough seas.” Wow, not only does Robert recommend them, he implies that Warren Buffet, Alan Greenspan, and Paul O’Neill do as well!

What they are

So, have I sold you on the value of preparing your personal financial statements yet? Great! So next you will want to know how. The essence of a statement of net worth is the total of items that you own that have value (assets) less the total of your debts and future obligations (liabilities) equals your net worth. Investopedia has an excellent page that gives the details of what to consider for assets and liabilities. The essence of the cash-based statement of income is total income (your salary, payments received for jobs or sales, etc.) less total expenses (money spent) plus (less) any increase (decrease) in the value of your assets that were not the result of putting more cash into them equals your net income, which is the same as the change in your net worth from the prior year to the current year. Got it? Take a look at the sample below brought to you by the AICPA (Professional Bean Counters of America).

There are two essential elements to any financial statements, the first is that the statement of net worth, which is called the Statement of Financial Condition here, has at minimum two consecutive time periods represented and the second is that the statement of income, here called the Statement of Changes in Net Worth, sums up to the difference between the two periods. To put it simply, your statement of income explains the change in net worth over a period of time, usually of one year. So, if you can get your net assets correct and then your income has to be correct as well, you may have to back into it (the technical term in accounting for this is a plug) but there you are!

Below are links to several free templates that will allow you to put together your own personal financial statements. Please note, in order to maximize the entertainment and utility values of preparing your own personal financial statements, I recommend pasting as many prior years as possible into the spreadsheet. That way, 2008 aside, you both get the heady rush that comes from seeing steadily increasing net values march across your screen and you can start crunching those numbers, calculating different ratios and comparing your performance over time. I warn must warn you, it is such an incredibly satisfying experience that you may find the hours go by until you squander an entire weekend just playing with the numbers!

Caveat Preparer, there are many philosophies about what exactly should go onto your statements; the AICPA has one way, Robert Kyosaki has famously made the case against including your residence, and the SBA has their own criteria. My opinion is that you really don’t need to expend gigantic amounts of time into this project for it to be useful. Stick to a method and be consistent over time. I rent, but if I had a house I’d probably include it at the price I paid for it less the amount I owed for it. I definitely would not include my car or any personal property though; the valuation would get to be a hassle and that’s not the point for me. I want to know how much my investments are going up and what I am spending my money on. On the other hand, if the debt you owe on those items is greater than their value, perhaps you do want to include that in order to be conservative.

As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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