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Safety Net or Crystal Ball? Predict your Future with a Financial Statement

Personal Financial Statement

So many big life changes depend upon our finances. Deciding when it’s the best time to, say, switch careers or start a new business, take off and travel the world or even retire would be so much simpler if we could see the financial implications of our decisions.

While big changes almost always feel risky—that’s the thrill of the unknown, after all—not all of our financial future is uncertain. In fact, putting together your personal financial statement can tell you how much financial risk you can weather. Taking the leap without that knowledge? It’s like trying to read tarot cards or tea leaves with blinders on.

What’s a personal financial statement?

A financial statement has two parts to it:

Balance sheet

First, your balance sheet totals everything you own (your assets) and everything you owe (your liabilities).

Your assets (what you own)


Your liabilities (what you owe)


Your net worth.

Simply put: it’s the amount you actually own (or are “worth”) after you’ve subtracted your debts.

Income Statement

Your income statement (sometimes called a “cash flow statement”) records how much money you make and how much you spend over a set period of time. It’s like a snapshot of your financial reality.

Step 1: Gather your financial information

Documents you will need include:

  • Current bank statements
  • Investment and retirement account information
  • Credit card statements
  • Car loans
  • Mortgage information
  • Pay stubs

Step 2: Prepare your balance sheet

Determine Your Assets

List the things of value that you own. These may include:

  • Cash: Money you have in the bank, money market accounts and CDs
  • Investments: The current value of your mutual funds, securities and stocks
  • Home value: The resale value of your home and other real estate
  • Automobile value: The resale value of your car(s) or recreational vehicles
  • Personal property: The resale value of jewelry, art or especially valuable furniture and collectables

Total your assets.

Determine Your Liabilities

List everything you owe. This may include:

  • Your remaining mortgage balance(s)
  • Your remaining car loan balance(s)
  • Student loans
  • Credit card balances
  • Personal loans

Total your liabilities.

Then, subtract what you OWN (your assets) from what you OWE (your liabilities).

Step 3: Prepare your income statement

First, determine the “snapshot” of time you want to analyze. It could be the last month, the last three months or the last year.

(As you think over your income and expenses put aside unusual occurrences like tax refunds, a big house repair or a sizeable bonus. What you are looking for your general, predictable cash flow.) You may even want to total up a few months to get the average for one month.


Then list all of the income you took in over that amount of time. This may include:

  • Your salary
  • Regular bonuses or commissions
  • Any income from rental properties, side jobs or other businesses

Total your income.


List all of your expenses over that same amount of time. If you need help coming up with your list of monthly expenses and bills, check out our free budgeting spreadsheet. This may include:

  • Rent/mortgage payments
  • Utilities
  • Loan payments
  • Vehicle expenses
  • Groceries
  • Healthcare costs
  • Insurance
  • Other regular fees and bills

Total your expenses.

Now subtract your expenses from your income. (Yes, this may be a negative number!)

Step 4: Read the Leaves: Interpret your financial statement

When you look at your net worth (the bottom of the balance sheet) you’ll see you have either a positive or negative balance. The positive amount represents how much you own after everything is paid off. A negative amount means that you owe more than you own.

When you look at your financial statement, a positive number means you’ve earned more than you spent in that period of time. A negative number means you’ve spent more than you have earned in that period of time.

Now put that information to work:

If you’re embarking on a big life change, look at your balance sheet and ask yourself:

  • Am I financially set up for my future, or do I have more to save and/or pay off before I can take this big risk?
  • Can I afford to sacrifice some income loss without going into further debt, or do I have to increase my net worth before I take on new financial risk?

If you decide you want to increase your net worth before taking the leap, there are two ways to go about it: You can increase your assets or decrease your liabilities. That’s where your income statement comes in. Examine your cash flow and ask yourself:

  • Can you reduce your debt by selling a car you owe money on?
  • Can you increase your assets by contributing more to your mortgage every month?
  • Next time you receive that bonus or tax refund, can you put it toward a big loan to dramatically decrease your liability?
  • Alternatively, could you invest it in your retirement fund to increase your assets?

Our financial future can feel mysterious—and scary—if we only think about our checkbook in day-to-day or month-to-month terms. When we take the time to look at the big picture, however, our future can feel more certain.

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