10-Qs and 10-Ks.
No, you don’t need to lace up your running shoes. Unless, your creditors are after you!
Rather, these are financial statements. They get submitted by public companies to the Securities and Exchange Commission (SEC) every quarter and each year.
These records provide a snapshot of a company’s performance. They get used to compare the business’s success from one quarter and year to the next.
These statements give investors and creditors a wealth of information (pun intended!). They help them to chart a company’s performance and identify trends.
Just like corporations, you should keep track of your money, too. By using a personal financial statement, you’ll gain valuable insights into your unique financial position and the habits that are leading to that outcome!
This document is your financial scorecard and gives a snapshot of your current financial health. It outlines your overall financial position based on one specific moment in time.
A personal financial statement starts with your private information. It includes details like your name, address, and the date the report was prepared. Then, moves on to the two main sections; the balance sheet and the income statement.
This part of the personal financial statement provides details on the preparer’s assets and liabilities. Assets are items that store value and can be sold for cash. Aside from checking and savings accounts, some examples include real estate, retirement accounts, and vehicles.
Liabilities are the debts that an individual owes to others. Lexico.com goes as far to say that they’re things whose presence or behavior is likely to cause embarrassment or put one at a disadvantage! Liabilities include mortgages, vehicle loans, and credit card debt.
The difference between an individual’s assets and liabilities is their net worth. It’s the amount of money they would have left after selling everything of value and paying off debts.
A negative net worth shows that they are living above their means and buying liabilities. Where as a positive net worth shows their building wealth and have some degree of financial freedom.
Net worth is a true measure of wealth. It’s more important than income because it reveals the amount of time someone can survive without needing to work!
How many months of freedom do you have?
This report is similar to your monthly budget. It accounts for all your income and expenses over a given period.
Your income is the amount of cash inflows you experience. It includes the money you receive from your job, investments, and other income types, too. Such as dividends and rental income from investment property.
Expenses are the goods and services that you spend money on. These cash outflows include your top expenses as well as your needs and wants.
The difference between your income and expenses is your savings. The more money you make and the less you spend, the more of it you will save!
Unfortunatley, most people use their savings to buy more stuff and sometimes they finance these purchases, which increases their debt burden and monthly expenses. As their lifestyle creeps higher, it leaves little leftover for savings and investments. As a result, these bad habits limit their freedom and can even handcuff them to a job for years or decades to come!
How are you using the money that you save?
This document helps you keep your finances in order. Not only is it easy to use, but it also provides valuable information to creditors.
Commercial lenders need the information in this report. They make you fill out a loan application, which is the lending equivalent of a personal financial statement. They make your financial data clear, which helps credit officers make lending decisions.
To qualify to invest in some alternative assets, you even need to fill out a personal financial statement. Many of the professionals sponsoring these opportunities are required by law to review your financials. It helps prove you have the income, assets, and ability to recover if an investment turns sour.
As a mortgage banker, I saw it all; high-income earners with negative net worth, low-income earners worth millions, and everything in between. I found that most high net worth clients were more organized and focused on their finances. They monitored their money using a personal financial statement to ensure they were on the path to their goals!
Creating a personal financial statement shows your financial health today. It helps you understand where you are now. But, when you track it over time, it provides the direction you’re heading in, too!
Overseeing your financial records is useful in guiding you towards your long term financial goals. They show your monthly and yearly progress as you work to create wealth.
When something gets tracked, it provides data points. Over time, this information shows progress that is either positive or negative. With this feedback, you can make changes to your financial strategy, ensuring your destination gets reached!
All my clients track their finances and you should, too. It will help you better adapt to the changes you are making in your life. You’ll see the progress you’re making and you’ll realize it’s only a matter of time before your goal gets realized!
I use Personal Capital to track my money. This app tracks your income, expenses, and net worth. So, any time you veer off course, you can take corrective action. Sign up now and receive up to $20!
A personal financial statement ties your income statement and balance sheet together. The decisions you make about one affects the other.
When you choose to spend your money on liabilities, your burn rate increases. The added payments reduce your savings, making it more difficult for you to build wealth and live out your dreams!
Instead, concentrate on acquiring assets that produce income. They’ll help increase your earnings and savings. Both of which allow you to use the power of compounding to achieve financial freedom faster!
A personal financial statement displays your financial standing. It shows creditors how you manage your money. But, most importantly, it reveals all the progress you’ve made towards the things you want most in life!
Which direction is your personal financial statement trending? Comment below.
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