Building Strong Personal Financial Statements By John Robert Maniego, RFP

In Benjamin Graham’s book entitled “The Intelligent Investor”, he summed up by saying that investors should use a “businesslike” approach to investing. Investing in shares is just like owning a business; and that investments must be approached as if one were buying a business. I believe that the author of one of the most famous finance and investment books was right and I believe the same applies to personal finance.

Managing your personal and financial affairs to some extent should be managed like a business simply because it attempts to look for ways to increase the value of your personal life like sending your children to school, purchasing a home, and having food to eat. It involves money. It needs the existence of long term partnerships between married couples, siblings, parents and their children in order to manage emotions and expectations fostering a mutually beneficial living household environment for all. Therefore like all businesses, it is also imperative that households and individuals manage and make household or personal financial statements.

Building personal financial statements is not yet a popular practice in the Philippines. Perhaps individuals forego creating financial statements because they simply think that their current lifestyle does not merit one or probably they are afraid to face the harsh reality of their financial situation. In a personal finance perspective, I think that people put themselves at a financial disadvantage by not creating a personal financial statement. They neglect to see the true financial health situation of their household, families or their lives. They can be deceived by thinking that, financially, everything is all right. They are deceived by thinking their income or savings can cover their current or future lifestyle only to wake up to a shocking reality of piling debt and hungry mouths to feed.

The benefits of creating one’s personal financial statements can be used by people as a progressive, proactive and forward looking decision making tool for the household. Financial statements will be able to show people a clear photographic snap shot of their current financial state realize their weak points and further enhance their strong points. Like in business, it can help people realize that they aren’t saving enough cash to pay for their child’s tuition fee due next month or a retirement happening in a few years. They realize that taking out a loan for an automobile upgrade or swiping a credit card to buy the latest Apple gadget may not be beneficial at this time because interest costs will just eat up future expected earnings to credit card payments.

Financial statements can help you realize other sources of passive income from prospective suitable investments like dividend from stocks; coupon payments from bond investments; capital gains from an increase in property or other fixed assets; indirect tax management benefit from interest payments; or the money earnings you would have lost to inflation if you have just left your savings in a savings account. All these you might never realized if you have never taken the time to make your own financial statements.

Personal financial statements are not very different from business financial statements except that personal financial statements are simple. Here are the steps that you can follow in creating your own personal financial statements.

1.Cash Flow / Income and Expense Statements

In personal finance, this is the most important financial statement that you need. This shows you the sources of monthly income vs. the amount of monthly expenditures that you have. Income sources can be categorized as variable and fixed or passive and salary paid income. Sources of inflows like bonuses, expected salary increases, expected earnings from financial assets should also be included.

On the expense side, monthly expenditures should include tax payments, mortgage payments, groceries, utility bills, savings for contingency funding, credit card payments, tuition fee expenses, etc. As a rue of thumb, be as thorough as possible when listing down your income and expense.

The difference should more or less be a positive value which is savings. Savings should be invested in a suitable financial investment to yield the highest possible yield for its proper risk/use. Usually financial planners project a personal cash flow statement for the next twelve months to be able to see an annual figure of what you need taking into account seasonal/monthly variability of income and expenses.

2.Balance Sheet

Like a business accounting balance sheet, the personal balance sheet should also be made by applying the universal accounting equation of Assets = Liabilities + Equity and categorizing items according to the duration of assets. For married couples, a combined balance sheet will suffice. Assets must be divided into cash items like a contingency fund (equivalent to at least six months living expenses). Next are the financial assets which are composed of mutual fund shares, time deposits, bond investments, receivable income from sole proprietorship business and shares of stocks in a family held corporation, and other shares of stock investment. Financial assets must be recorded using market values. Lastly are the long term assets like home appliances, designer furniture, and precious jewelry, luxury items like paintings & sculptures, family home and other real estate properties.

On the liabilities side, all types of outstanding debt should be included like credit cards, home and automobile mortgages, personal loans, tax payables, advances etc. The difference between personal assets vs. outstanding personal liabilities is your personal net worth. The net worth is basically an indicator of your financial stability. This is where people get deceived. By focusing on assets alone, people get the misconception that they are financially well off, but in reality they are sitting on a pile of debt which will eventually catch up on their income. If most of your assets are funded by debt then I suggest hiring a personal financial planner or start paying off debt to free up cash from interest payments. All ways remember that each person should not be a slave to money. As the popular adage goes, every person must maximize his full potential by letting your money work for you.

Creating one’s personal financial statements is a relatively easy task. For individuals with no accounting background, a financial planner can help do this for you. You just need to be open and supply him or her with all the right financial information. Updating and monitoring at least annually is also a must because personal circumstances change.

On a more personal note, making a personal financial statement will change the very core of your existence for the better. For myself, it showed me the value of how to properly handle my personal finances. I desired less of material possessions; it showed me that happiness is not all about what I can buy but what I have and making the most of it. I learned that true wealth is not in the amount of money that you have, but is in the amount of love, understanding, humility and support that you give people. Creating financial statements will basically give you empowerment; the empowerment to know yourself and have the right attitude. The right attitude that will not only point you toward the right kind of financial freedom, but the right attitude in the way you live your life.