Achieving your financial goals, whether it’s buying a home, retiring comfortably, or simply gaining control over your spending, requires a clear understanding of your current financial position. This is precisely where personal financial statements become indispensable. Much like businesses use financial statements to gauge their health, individuals can use these simple documents to get a comprehensive snapshot of their money.
There are two primary personal financial statements you should familiarize yourself with: the personal balance sheet and the personal income statement. The balance sheet provides a snapshot of your financial health at a specific point in time, showing what you own (assets) versus what you owe (liabilities). The income statement, on the other hand, tracks your income and expenses over a period, revealing your cash flow.
The personal balance sheet details your assets (cash, savings, investments, property, vehicles) and your liabilities (loans, credit card debt, mortgages). By subtracting your total liabilities from your total assets, you arrive at your net worth. Tracking your net worth over time is a powerful indicator of your financial progress; a rising net worth means you’re building wealth.
The personal income statement, also known as a cash flow statement, lists all your sources of income (salary, freelance, investments) and all your expenses (fixed and variable) over a month or year. This statement helps you see if you have a surplus (more income than expenses) or a deficit (more expenses than income). It’s crucial for identifying spending habits and areas for improvement.
Using these statements helps you set realistic financial goals. For instance, if your balance sheet shows high debt and low savings, your initial goal might be debt reduction. If your income statement consistently shows a deficit, your goal might be to cut discretionary spending or find ways to increase income. They provide the data to inform your decisions.