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Chizoba Morah is a business owner, accountant, and recruiter, with 10+ years of experience in bookkeeping and tax preparation.
Updated December 16, 2023 Reviewed by Reviewed by Ebony HowardEbony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.
Many individuals look at their bank and credit card statements and are surprised by how much they've spent. One simple method of accounting for income and expenditures is to keep personal financial statements just like the ones used by corporations. Financial statements provide you with an indication of your financial condition and can help with budget planning. There are two types of personal financial statements: the personal cash flow statement and the personal balance sheet.
A personal cash flow statement measures your cash inflows and outflows to show you your net cash flow for a specific period. Cash inflows generally include:
Cash inflow can also include money received from the sale of assets like houses or cars. Your cash inflow essentially consists of anything that brings in money.
Cash outflow represents all your expenses regardless of size. Cash outflows include these types of costs:
The purpose of determining your cash inflows and outflows is to find your net cash flow. Your net cash flow is simply the result of subtracting your outflow from your inflow. A positive net cash flow means that you earned more than you spent and you have some money left over from that period. A negative net cash flow shows that you spent more money than you brought in.
A balance sheet is another type of personal financial statement. A personal balance sheet provides an overall snapshot of your wealth at a specific period in time. It's a summary of your assets or what you own and your liabilities or what you owe. It results in your net worth: your assets minus liabilities.
Assets can be classified into three categories:
Liabilities are what you owe. They include current bills, payments still owed on some assets like cars and houses, credit card balances, and other loans.
The "debt avalanche" and the "debt snowball" are two popular methods for paying off liabilities such as credit card debt.
Your net worth is the difference between what you own and what you owe. This figure is your measure of wealth because it represents what you own after everything you owe has been paid off. You owe more than you own if you have a negative net worth.
You can increase your net worth by increasing your assets or decreasing your liabilities. You can increase assets by increasing your cash or increasing the value of any asset you own. Just make sure that you don't increase your liabilities along with your assets.
Your assets will increase if you buy a house but your liabilities will also increase if you take out a mortgage on that house. Increasing your net worth through an asset increase will only work if the increase in assets is greater than the increase in liabilities. The same goes for trying to decrease your liabilities. A decrease in what you owe has to be greater than a reduction in assets.
Personal financial statements give you the tools to monitor your spending and increase your net worth. They're not just two separate pieces of information. They work together.
Your net cash flow from the cash flow statement can help you in your quest to increase your net worth. You can apply the money to acquiring assets or paying off liabilities if you have a positive net cash flow in a given period. Applying your net cash flow toward your net worth is a great way to increase assets without increasing liabilities or to decrease liabilities without increasing assets.
Non-liquid assets are those that you can't sell or dispose of quickly if you need cash. Real estate, automobiles, artwork, and jewelry are all non-liquid assets. They can also lose value in the sales process. You might purchase your home for $350,000 and then have to sell it for only $300,000 if you find yourself in an emergency where you have to liquidate assets as quickly as possible to raise cash.
The U.S. Bureau of Labor Statistics reported in September 2023 that average annual expenditures per household were $72,967 in 2022. This was up 9% from the year before. Average income before taxes increased only 7.5% during the same timeframe.
It's been said that you should save six months' worth of living expenses tucked away but the U.S. Securities and Exchange Commission puts a slightly different spin on that. It says you should have six months' worth of income saved. That works out to $30,000 if you earn $60,000 a year.
The SEC also suggests that you might want to consider paying off your high-interest credit card debt to amass some savings rather than invest your money, hoping to earn some. You might find that the amount you're saving on interest is more than a safe investment such as a money market or mutual fund would pay you in a given period.
Approach your finances like a financial advisor during your annual review. If you have a negative cash flow or you want to increase positive net cash flow, the only way to do it is to assess your spending habits and adjust them as necessary. You'll be well on your way to greater financial security if you use your personal financial statements to become more aware of your spending habits and your net worth.
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The state and stability of an individual's personal finances is called financial health. Here are ways to improve it.
For tax purposes, household expenses are a per-person breakdown of general living expenses.Discretionary income is the amount of an individual's income that is left for spending, investing, or saving after taxes and necessities are paid.
Average propensity to consume measures the percentage of income that a person or an entire nation spends rather than saving or investing.
A personal financial statement is a document outlining an individual's financial position at a point in time based on their assets and liabilities.
Personal financial management is the software that powers personal finance and many mobile banking apps.
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