Creating a Personal Financial Statement Using a Finance App
One of the major needs when setting financial goals is tracking them. You need to know where you stand and how far from your goal you remain.
This does not simply help you know whether you need to take on more work, it helps you show a bank or credit union that you present a credit-worthy financial situation. A personal financial statement helps you do this by helping you understand and monitor your goals.
Personal Financial Statement Defined
The term personal financial statement refers to a document, form, or spreadsheet showing an individual’s financial position at a specific point in time. It presents this financial data in a manner preferred by financial institutions.
This document helps you by showing your certified financial planner (CFP) how to help you develop your investment portfolio or by pointing to investment and savings areas you could include in your financial portfolio to round it out.
It can also help your certified public accountant (CPA) find avenues for you to minimize your income taxes.
This document includes your personal assets and liabilities, equity, and net worth. To successfully manage your finances, you need to set specific goals and track your progress.
The goal of “become wealthy” does nothing for you, while a goal of “save $10,000 by 24 months from today” provides you with a specific fiscal goal from which you can begin working. Twenty-four months or two years you can also refer to in a number of days. You want to save $10,000 in 730 days.
You divide 10,000 by 730 and you learn that you need to save about $13.70 per day to do that. While wealth is an intangible phrase and $10,000 seems a large sum to many people, when you do the math and find out that it equals one less Starbucks coffee and a cheaper lunch per day, it becomes manageable. You pack a sack lunch, bring a Via packet, and voila – in two years’ time, you have $10K in the bank earning interest.
The personal financial statement (PFS) provides the tool by which you track your progress to this goal. You update it each month so you can see your savings grow. In a 30-day month, you should see that savings account grows by about $411. The PFS lets you know how you’re doing each month.
If you notice that your savings only grew by $200 in a given month, this lets you know that you need to review your finances carefully. Something happened that threw your savings off track. Perhaps it was an emergency dental appointment, or your car needed repairs. It also helps you find things like you spent money you were supposed to save. Maybe you saw shoes you just had to have. You need to catch that immediately and stop yourself so you can save your money and grow your wealth.
How Do You Make a PFS?
You could download a personal financial statement template for Excel. The easier way though is to download and install a software app that lets you enter your numbers, then does the rest for you.
Net Income
If you were a business, the PFS would be called a profit and loss statement. The PFS essentially solves the equation Net Income = Revenue – Expenses.
You plug in the numbers for your revenue (typically your salary or earnings) and your expenses (every bill you pay each month and the occasional ones, too). You solve the equation by obtaining the solution of your net income.
That is NOT your net worth!
Your net income tells you the monthly or annual cost of sustaining your lifestyle. Your net income would change if you moved to a more or less expensive place to live. It would also change if you changed cell phone plans or ate out less often.
Banks want to see this because they want to see how good of decisions you make and how much cushion you have each month. If you spend more than you have or they see one or more budget areas vastly out of whack, they probably will consider you a poor risk for a loan.
What’s out of whack?
Well, for example, you should spend about one-third of your monthly income on rent. If you make $1,200 per month, only $400 of it should get spent on rent. If you make $4,800 per month, you should spend, at most, $1,600 per month on rent. If a bank sees that you make $2,000 per month, but spend half of it on rent, they will typically see that as a problem.
They do make exceptions. Most banks in New York City, for instance, understand that most people in the city spend more than one-third of their income on housing. That’s because its rents are among the highest in the country. It is more important to have a warm, dry place to sleep with utilities than it is to just pay one-third of your income.
The PFS form helps you identify these problems. Problem definition lets you begin to solve the problem. You define your cost of living with your PFS. That lets you identify areas within your budget that you can reduce expenses to lower your cost of living.
Okay. But what is my net worth?
Ah. Your net worth, my net worth, the net worth of Bill Gates all differ.
Your net worth refers to your assets minus your liabilities. Put another way, stuff you own minus stuff you owe.
If you own your house outright, then the value of your home contributes to your net worth. It increases it, typically. If you own investment property such as rental homes, that also contributes to your net worth. The only time your first home does not count in this calculation is when you want to qualify as a preferred investor. That is not something you probably need to concern yourself with if you do not yet have a PFS and have not saved money. Those investors are high-income individuals like Gates who fund major businesses. They’re the folks that startups hit up for angel investment or venture capital.
You add up the value of your personal property owned outright. If you still owe on your house, your mortgage goes into the liabilities section because that’s a monthly cost. You do get to count any equity you built in the assets though. Your cryptocurrency and investment portfolios go into assets. Your car payment goes into liabilities as does your student loans.
Let’s get your net income figured out first though. You need to get on the right track and set achievable goals. You work towards those goals and you meet a milestone. Let’s get your PFS set up in an app, so you can track your progress.
Do It the Easy Way: Apps to Create a Personal Financial Statement
You could gather bills, manually enter data, attempt to learn to use an Excel template and formulas. Why? There’s an app for that! Just use an app.
Now, before you jump in and start with the first app you see and have it import all of your information from your bank accounts and your PayPal, let me warn you. Unless you happen to be really, very, totally, impeccably careful with money, the first time you use one of these your net income will probably be negative.
It happens. You are just learning financial management. You did not mess up entering things if it is negative. That just means you need to change a few things about how you spend money. Your first order of business will be to pay off any loans or credit cards completely and stop using the credit cards. When you can live off of only what you earn each month – and live well – you’ve got this.
You won’t find investment apps I use like Acorns here nor will you find those you must pay for like Quicken. I humbly assume that you’re in a similar situation to where I was when I was working a few jobs to pay for my education at The University of Oklahoma. (Go Sooners!) Those jobs paid for what grants and loans did not and most of us have to do that. We take on multiple jobs and learn to budget so we can pay off our student loans or a car loan, etc. I left off Mint because that app tries to entice you to take out loans while I’m trying to get you to the point where you never need to do so. You will have money in the bank, savings, investments, stocks, etc.
Your first step is organizing your finances so you know what you have and what you spend, so you can eliminate expenses.
Now, pick a PFS app and get started.
You can use Mobills on your smartphone, tablet, or desktop computer. You give it access to read your bank account and PayPal plus your credit cards. It pulls in your data, so you know what you earned and what you spent. Mobills helps you set up a budget plus track how you stick to it. You’ll find the PFS among the reports you can run. It also lets you set bill payment reminders which helps you hugely if you do not already use autopay.
You still get to run reports in Clarity Money, but it works great for visual learners. After you enter your account numbers and it imports your data, it produces a pie chart to show you your net income. This helps you understand your budgeting and areas in which you overspend become obvious. You might find its subscription tracker handy for tracking which services you pay for monthly and perhaps never use. You can use its FDIC-insured savings option to set goals and save, save, save.
You can get fancy with Every Dollar. This app helps you set up a zero-based budget, so you allocate each dollar you make including savings. Not only can you track spending, but you can also split expenses. It also lets you track your current spending rate, plus see what’s left to re-allocate to a loan you want to pay off quickly after you pay every bill which means paying yourself, too. Use the mobile and the desktop apps.
Choose Spendee if you need to work with a partner like your parent to manage finances, accounts, or share expenses. This makes a great transition app if you need to learn how to manage your finances while you’re still in college. Your mom or dad can sign into the app, too, and help ease the transition from them managing your expenses and paying for stuff to you doing so yourself. It helps because you can sit down together and strategize. The app puts all of the information in front of you giving you access to the same info as “the grownups” since the time for you getting proverbially sent out of the room for adult discussion is close to an end. You are the grownup now, but it can help to use an app like Spendee to artfully transition from mom and dad paying the bills to you doing so. The user interface makes it easy to understand everything. Unlike the apps your folks probably use, this one lets you add your favorite cryptocurrencies, so you can track their values plus, it accommodates cash expenses. That means when you pull money out at the ATM, you can manually create an entry to allocate what you spent it on, so it appears in the right budget category.
Building Your Financial Future
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