Personal Financial Statement - why you should be keeping one

Personal Financial Statement - why you should be keeping one

Stop thinking about wealth in terms of income versus expenses. Think of wealth as assets versus liabilities. A personal financial statement will help you track your growth.

You’ve been taught to think about money in monthly increments. House and car payments are broken down into monthly payments to make them more palatable. When you build a budget, you focus on the monthly breakdown of your income versus your expenses. If that budget were for a business we would call it a profit and loss statement. Here’s the problem - if you are focused on building wealth, you should be focused on assets versus liabilities. Which is why you need to be keeping a personal financial statement.

A personal financial statement is a listing of all the things you own that are worth money (assets) and all of the things you owe money on (liabilities). The end result is equity, or in personal financial terms rather than business terms, wealth.

The parts of a Personal Financial Statement

A personal financial statement, or PFS (you know how I love acronyms when I have to type the same phrase over and over…), starts with Assets. Simply think of Assets as resources you have that have value to someone else. An asset that can’t be sold, or if you like fancier terms, liquidated, isn’t an asset.

Assets on a PFS are always listed in order of how liquid the asset is, or how quickly it could be exchange or sold for something else. That is why every personal financials statement starts with cash as the first asset to track. From there the categories flow in order of the most to the least liquid. That looks something like this…

Cash → Marketable Securities (e.g. stocks and other investments) → Notes Receivable (i.e. you loaned someone money that they owe you) → Cash Value in Life Insurance → Real Estate → Automobiles → Personal Property (e.g. furniture, jewelry, etc.)

Liabilities, or debts you owe, work in the same way, with those that are the most liquid being listed first. They generally flow like this…

Accounts Payable (i.e. short term, less than one year, loans you owe on) → Notes Payable (i.e. loans with terms greater than one year) → Installment Accounts (i.e. loans were collateral, other than real estate and such as automobiles, is involved) → Real Estate Mortgages → Unpaid Taxes

Once you have everything listed, you simply subtract the liabilities from the assets to get to your net worth.

A person’s net worth typically doesn’t change much from month-to-month. So, updating your PFS on a longer schedule is fine. The key is that you should be tracking this and your net worth, or equity, should be consistently growing. If not, then your money isn’t working for you, its working for someone else.

Other reasons you might need a Personal Financial Statement

If you are a business owner and you plan to borrow money to help the business grow, you will need a PFS. This is especially true if you are hoping to get an Small Business Administration (SBA) loan. There, a PFS is required.

Be mindful that you don’t have to know dollar amount to the penny. It is acceptable to round up or down. What you don’t want to do is lie on your PFS. Lenders will ask for supporting documents to verify what you have listed. For example, for cash they might ask for bank statements.

Personal Financial Statement templates

If you are interested in starting to track your net worth there are a few templates you can use.

My first recommendation is my own template that I built in Notion (a free software solution that I do virtually everything inside of, including drafting this blog post). To get access it to be sure to subscribe to this newsletter, its free, and then email me at jonathan@jonathanmillspatrick and I'll give you access.

The second option is the SBA’s own PFS template. You can find it here.