A Critical Tool – The Personal Financial Statement

Financial security is important for today and tomorrow.  Living our life is dependent upon money.  It may be your money or someone else’s.  We need it to meet our basic needs such as food and shelter.  However we can do so much more than just meet our basic needs.  Do you dream of financial freedom?  To live the lifestyle you desire?  How close are you to your dream?  To find out start with creating your own personal financial statement.

A Personal Financial Statement calculates your net worth.  Knowing your net worth will provide an insight as to how financially sound you are and how prepared you are for your future.  Banks use a personal financial statement when providing financing.  Many who fill it out have little understanding of this statement.  Majority are filled out incorrectly.  To begin with I am not a fan of the small, really small print, on the standard bank form.  But the form does provide a starting place to gather information.

Let’s break the personal financial statement down into 3 parts…

ASSETS – A list of your assets or financial resources on hand.  We accumulate different types of assets.  Not all assets are equal.  Some are easily accessible like cash or publicly held stocks.  Others provide tax benefits such as retirement accounts.  Most people have assets that create their lifestyle such as home or car.  Personal lifestyle assets typically lose value very quickly.  The most complex assets to value and to turn into cash consist of privately held businesses, rental property and land held for development or for sale.

LIABILITIES – The other side is a list of your liabilities or what you owe to others.  This includes consumer debt such as credit cards, school loans and medical bills.  Next we look at secured debt or mortgages.

NET WORTH – This is what is left after you subtract your liabilities from your assets.  The higher the net worth the more financial sound you are.


Now that you have built your personal financial statement here are some issues to watch for:

Liquidity – If something happened do you have access to cash?  Enough cash to help?  The piggy bank on the bookshelf won’t do it.  It is recommended that you maintain 3 to 12 months of living expenses.

Retirement funds – Are you prepared for your future?  Are you putting enough away so that you don’t have to live with your kids when you can no longer work?  We would all like to enjoy the golden years.

Lifestyle assets – This consists of home, vehicles, jewelry, vacation home, big toys, etc.  They create your lifestyle.  Is most of your financial worth invested in your lifestyle?  This is normally the poorest type of asset, since it loses its value very quickly.

Debt – Is debt taking over?  Credit card debt, school loans, and medical bills can accumulate quickly.  They come at a time when money is tight.  Do you have the discipline to pay cash for what you need today? Do you delay immediate gratification?

Investments – Financial experts recommend that you invest 10% of your annual income.  The idea is to create a “passive income stream” with these funds.   Passive income, such as interest income, dividends, rental income and royalties, provide an income stream that does not require you to work.  Have you been investing?

Business value – This is a very unique, complicated asset that comes with high risk.  A personally owned business can be worth 5 times annually net earnings.  Due to the complexity the safest value is the checking account balance.  Note that  many millionaires have been created from a small business. The key issue is to cash out.

According to Suze Orman “a big part of financial freedom is having your heart and mind free from worry about the what ifs of life”.   Financial freedom is a dream worth having.  Start by determining where you are today.

If you need assistance or just want another opinion regarding your personal financial statement – we can help.   Our staff at FOCUS CPA can assist with gathering your personal financial and create a plan to improve your financial health.

Contact our office at 920-639-0861 or email Mary@focus-cpa.com to set up a meeting to discuss your needs.

By Mary Guldan-Lindstrom

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