Personal Finance: Creating an Accurate Personal Financial Statement

Are you a millionaire? If so, you are probably reading this from an exotic locale, trade winds blowing through your hair, pineapple drink in hand.

More realistically, the average American worth $1-2 million lives in a relatively expensive community and reports feeling little financial margin. They know all too well that a million dollars isn’t what is used to be.

The question does bring into focus the larger issue of net worth, a readily knowable data point that remains fuzzy to many. Whether or not you are a millionaire may be an antique consideration, but the questions that fall out under the issue of net worth are anything but esoteric:

• What is my liquidity position? Do I need a more substantial emergency fund?
• How is my household budgeting/spending and the resulting annual surplus/deficit impacting my net worth?
• What will I be worth upon retirement?
• Will I have significant assets to draw upon in retirement? How likely am I to run out of money?
• Does my net worth, or projected future net worth expose my estate to the estate tax?

To determine where you stand, you should create an accurate personal financial statement (aka “balance sheet”). This statement will list all assets and liabilities and provide a snapshot of your financial position at a specific point in time.

Below is a simple example. In this example, Jack and Jill’s net worth is $1,703,000.

Let’s dig a little deeper to highlight a few details.

First, all assets and liabilities should be valued at fair market value (“FMV”), on a specific date, which you should include in the heading of the statement. Concerning FMV, we will quickly consider three classifications and how it can be determined within each:

• Cash and cash equivalents (liquid assets with little or no risk of loss of principal): arriving at FMV is fairly straightforward with a dollar in these buckets being worth a dollar.
• Investments (assets held for income, growth and/or capital appreciation): assets here range from common stocks which can be marked-to-market every minute of the day to assets such as investment real estate, which will be more difficult to value. Investments might also include illiquid, privately held ownership stakes and even numismatics. For these and similar hard-to-value assets, conservative valuations are recommended.
• Personal use assets (used primarily for personal benefit or enjoyment rather than held primarily for investment purposes): Beyond real estate and automobiles, many assets falling into this category are both hard to value, and routinely overvalued. If you should need to sell furniture or jewelry in a hurry and in hard times, you won’t get 60 cents on the dollar, you’ll get 15.

For both real estate and collectibles, professional appraisals can help but no one is going to conduct these for the purpose of a personal financial statement so, in lieu of appraisals, simply assign conservative values to all such assets.

Some planners recommend subdividing assets into “investments” and “personal use assets” (as seen in the example above), conceptualizing that these asset classes are distinct in terms of utilization, available liquidity, etc. The idea behind this subdivision goes something like: if cash is needed, stocks can be sold and CDs can be redeemed. On the other hand, absent severe and unexpected financial hardship, the diamond engagement ring and primary residence are off-limits.

Hopefully, this introduction to personal financial statements will encourage you to create or update your own in order to better understand your financial situation.

Before ending, let me share one related resource:

https://personalfinancedata.com/networth-percentile-calculator/

This calculator will tell you in what percentile your net worth places you, based on your age.

Here, you can also dig through the data to learn that those aiming for wealth should follow this strategy:

• graduate from college
• get and remain married
• seriously consider owning your own business

While at this site, check out other great calculators like this one: https://personalfinancedata.com/income-percentile-calculator/