Question

What two personal financial statements are the most important to personal financial planning?

Answer 1

Similar to the corporates, financial statements facilitate an indication of the financial condition of an individual and it can be used for budget planning. There are two important types of personal financial statements which are as below:-

• The personal cash flow statement
• The personal balance sheet

Personal Cash Flow Statement

A personal cash flow statement is mainly used for determining the cash inflows and outflows so that the net cash flow for a certain period of time can be determined.
Cash inflows generally include the following:

• Salaries
• Interest from savings accounts
• Dividends from investments
• Capital gains from the sale of financial securities like stocks and bonds

Cash outflow includes different types of expenses, irrespective of size. Cash outflows include the following types of costs:

• Rent or mortgage payments
• Utility bills
• Groceries
• Gas
• Entertainment (books, movie tickets, restaurant meals, etc.)

Personal Balance Sheet
A personal balance sheet can be seen as the second type of personal financial statement. It is mainly used to facilitate the comprehensive picture of the wealth of an individual at a certain period of time. It includes the summary of assets and liabilities and the net worth

Assets are of three types; liquid assets are those which can be converted into hard cash easily such as money market accounts, cash, saving accounts. Large assets are mainly houses, cars, boats, artwork and furniture, and lastly the investments which are     bonds, stocks, CDs, mutual funds

Liabilities can be seen as what an individual owes. Current bills, payments still owed on some assets like cars and houses, credit card balances and other loans are included in it.

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