Most household budgets are quite dynamic and, like a river or stream, are constantly changing and subject to unexpected disruptions. So how do you know what the financial health of your household is at any given point? If you want to see a snapshot of your finances at a particular point in time or wish to monitor fluctuations in the value of your assets or level of liabilities and net worth, you will want to create a personal financial statement. This statement is split into two main components: assets and liabilities. While assets relate to things such as income, securities, and properties, liabilities refer to things such as debts, unpdaid bills, and overdue taxes.
The Importance of Using Personal Financial Statements
Each time you prepare a such a statement, you create a snapshot of your finances at a particular point in time. To monitor fluctuations in your finances, you may choose to prepare a financial statement periodically (on a set date every month, quarter, bi-yearly etc.) and compare statements. You can also use these financial statements to experiment with different budgetary options and to plan for certain possible outcomes.
|Cash (in the bank, CDs, money market accounts)||$__________|
|Securities (mutual funds, college savings, etc.)||$__________|
|Real Estate (resale value of your home)||$__________|
|Vehicles (resale value)||$__________|
|Cash Value Life Insurance||$__________|
|Individual Retirement Accounts||$__________|
|Credit Cards Payable||$__________|
|Real Estate Mortgages Payable (remaining balance)||$__________|
|Land Contracts Payable||$__________|
|Life Insurance Loans||$__________|
|TOTAL LIABILITIES AND NET WORTH||$__________|
|(Assets always equal Total Liabilities and Net Worth)|
How to Use a Personal Financial Statement
It is important to be as honest as you can when calculating your liabilities and income, since you will be able to make better decisions with the most accurate information. And if your net worth is negative, this doesn't automatically mean you're in financial trouble (and likewise, even those with a positive net worth can have some financial problems to iron out). Of course, any personal financial statement needs additional context in order to have sufficient meaning. For instance, someone pursuing an advanced degree may be racking up debt while bringing in very little income, but that educational investment purportedly will pay off in a higher salary after graduation.
Once you document all asset and liability figures, total your assets and liabilities. Next, subtract total liabilities from total assets to determine your net worth figure. Certain types of debt, such as a mortgage, can be considered "positive" debts as long as you're able to consistently make your monthly mortgage payments. Your ultimate goal is to regularly increase your assets while making sure your liabilities are kept in check and on a downward trajectory. And keep in mind that the cost of carrying debt (particularly credit card debt) is reflected in interest rates that are generally higher for those with lower credit scores.