Personal financial statements include income statements, balance sheets and budgets. These statements are important tools in evaluating and monitoring your financial status and should be prepared and revised regularly. Without them, it is difficult to deal with planning problems and opportunities.
Accurate and complete personal recordkeeping facilitates the financial planning process and enhances your state of mind. SCM provides guidance to assist you in establishing an effective system.
- Preparing the Balance Sheet- The balance sheet shows your assets, liabilities and net worth. The level of detail should be appropriate to their usage. Sources of information include checkbook, broker’s statement, wills, leasing and insurance policies, safe deposit box contents and tax returns.
- Preparing the Income Statement– The income statement carefully enumerates your income and expenses. The chief sources of income include wages, bonuses and profit-sharing, transfer payments and investment income. Expenses include mortgage or rental payments, utilities, taxes, insurance premiums, household expenses, loan payments, tuition, medical expenses, alimony and savings.
- Preparing Budgets- A budget is essentially an income statement prepared in advance. It helps your decision-making process by defining problems in spending patterns, identifies opportunities to overcome these problems and allocates resources intelligently. The steps to prepare a budget include setting goals, determining your current situation, selecting proper budget form, realistically forecasting monthly receipts, listing monthly expenses, and comparing actual to target receipts and expenditures.
- Analyzing Financial Statements– Financial analysis is the examination of your finances from a variety of perspectives in order to fully understand the greater situation and determine how best to strengthen your financial affairs. SCM evaluates the income statement for short-term liquidity, flow of funds, capital structure, use of assets and short-term performance. SCM looks at the balance sheet for asset mix, leverage, net worth, asset valuation, retirement preparations and contingency liabilities.
- Recordkeeping– Many clients don’t realize how simple it is to create an adequate recordkeeping system. The main components are a safe deposit box, effective filing system for active files and keeping inactive files in storage. The easier the set up is to use, the more likely you will sustain an interest in its value. Other adult family members should know where your records are located, their basic content and the logistics of your accounting system.
