There are a few statements that will really help you understand your financial picture and you should use to keep track of your finances.  These help your be aware of what your finances look like and where your money is going.  The two most important ones are your Personal Financial Statement and your Income and Expenses Statement.

  1. Personal Financial Statement (PFS)
    • Your PFS is also known as your Net Worth Statement or Balance Sheet and they are essentially the same thing for the purpose of your personal finances.  You may hear Net Worth Statement or Balance Sheet when it comes to listing company assets but for your personal assets we usually will just call it your PFS.
    • This statement should show all of your Assets and Liabilities for a specific point in time resulting in your Net Worth.
    • I would recommend updating and reviewing this statement at least once each quarter.
      • Assets – your assets should be split into two categories: your liquid assets and your fixed assets.
        1. Your liquid assets consist of cash, investments, retirement accounts, etc.
        2. Your fixed assets consist of non-liquid assets, personal property such as cars, your home, computers, household goods, etc.)
      • Liabilities – your liabilites should include any debts you have (mortgage on your home, student loans, credit card debt, etc.)
      • Your Net Worth is = to your Assets minus your Liabilities.
  2. Income and Expense Statement
    • Your Income and Expense Statement can also be though of as your Cash Flow Statement.
    • This statement reflects cash inflows and outflows over a period of time.  So for example all of your income and expenses over the course of the month.
    • Cash inflows – consists of any income you are receiving such as your salary, wages, dividends, interest and/or realized capital gains.
    • Cash outflows – consists of anything you are spending money on such as your consistent expenses (rent, utilities, loans) as well as daily expenses and discretionary spending.
    • Your Cash Inflows minus your Cash Outflows will determine if you are living within your means.
      • If you have a positive balance you have a surplus of income and are spending less then you bring in every month and are living within in your means.
      • If you have a negative balance you have a shortage and are spending more money than you are making that month and are NOT living within your means.  If you continue to live a lifestyle where you are spending more than you earn you will eventually deplete your money and wind up in a debt or bankrupt.

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