Personal Financial Statements

Personal financial statements are fundamental documents that depict a client's financial status at a given point in time. As a CFP professional, understanding how to prepare, analyze, and interpret these statements is essential for developing effective financial plans and tracking client progress toward their goals.

There are two primary personal financial statements:

1. Statement of Financial Position (Balance Sheet) - A snapshot of what the client owns and owes at a specific moment
2. Statement of Income and Expenses (Cash Flow Statement) - A record of money flowing in and out over a period of time

Statement of Financial Position (Balance Sheet)

The balance sheet presents a client's financial position at a specific point in time. It is properly dated "As of [Date]" (e.g., "As of December 31, 2025"). Think of it as a financial photograph - it captures exactly where the client stands on that particular date.

The fundamental equation for the balance sheet is:

Assets - Liabilities = Net Worth

If total assets exceed total liabilities, net worth is positive. If liabilities exceed assets, net worth is negative, indicating the client owes more than they own.

Asset Categories

Assets on a personal balance sheet are typically organized into three categories:

1. Monetary Assets (Cash and Cash Equivalents)

These are highly liquid assets that can be quickly converted to cash with little or no loss of value:

• Cash on hand
• Checking and savings accounts
• Money market accounts
• Certificates of deposit (CDs) maturing within 12 months
• U.S. Treasury bills
• Cash value of life insurance

2. Investment Assets

These are assets held primarily for growth or income generation:

• Retirement accounts (IRAs, 401(k)s, 403(b)s)
• Brokerage accounts
• Stocks, bonds, and mutual funds
• CDs maturing beyond 12 months
• Real estate investments (not primary residence)
• Business ownership interests
• EE and I Savings Bonds

3. Personal Use Assets

These are assets used for personal purposes rather than investment:

• Primary residence
• Automobiles
• Furniture and household items
• Jewelry and collectibles
• Recreational vehicles and boats

Important: Personal use assets should be valued at fair market value - the price you could get by selling them today, not the original purchase price or a future anticipated value.

Liability Categories

Liabilities represent what the client owes to others and are categorized by when they must be repaid:

Current Liabilities (Due within 12 months)

• Credit card balances
• Outstanding utility bills
• Short-term loans
• Current portion of long-term debt (payments due within the year)
• Medical bills
• Tax obligations due

Long-Term Liabilities (Due beyond 12 months)

• Mortgage balance
• Auto loans
• Student loans
• Home equity loans/lines of credit
• Personal loans with extended terms

Sample Balance Sheet Structure

Statement of Income and Expenses (Cash Flow Statement)

While the balance sheet shows financial position at a point in time, the cash flow statement shows the flow of money over a period of time (e.g., "For the Year Ended December 31, 2025" or "For the Month of January 2025").

The cash flow statement helps identify:

• Where income comes from
• Where money is being spent
• Whether the client has a surplus or deficit
• Opportunities to increase savings

Income Sources

Earned Income:

• Salary and wages
• Bonuses and commissions
• Self-employment income
• Tips and gratuities

Investment Income:

• Interest from savings and bonds
• Dividends from stocks and mutual funds
• Rental income
• Capital gains distributions

Other Income:

• Social Security benefits
• Pension payments
• Alimony or child support received
• Inheritance or gifts

Expense Categories

Fixed Expenses (consistent month to month):

• Mortgage or rent payments
• Auto loan payments
• Insurance premiums
• Property taxes
• Student loan payments

Variable Expenses (fluctuate monthly):

• Utilities
• Groceries
• Gasoline
• Entertainment
• Clothing
• Dining out

Discretionary vs. Nondiscretionary Expenses

This distinction is critical for financial planning:

• Nondiscretionary expenses are essential costs that do not go away if you lose your job: housing, utilities, food, debt payments, insurance
• Discretionary expenses are optional spending that can be reduced or eliminated: entertainment, dining out, vacations, subscriptions

CFP Exam Tip: The emergency fund ratio uses nondiscretionary expenses in its calculation, not total expenses.

Net Worth Changes Over Time

Understanding what causes net worth to change is essential for financial planning. Net worth increases when:

• Assets appreciate in value (investments grow, home value increases)
• Income exceeds expenses (positive cash flow)
• Liabilities are paid down

Net worth decreases when:

• Assets depreciate or lose value
• Expenses exceed income (negative cash flow)
• New debt is acquired

Analyzing Financial Statement Transactions

Practice Problem: Consider the following transactions. What is the net change in net worth?

1. Purchased $10,000 of furniture on credit cards
2. Stocks in a brokerage account increased by $5,000
3. Spent $2,000 in cash on vacation
4. Purchased a $30,000 car with 10% down ($3,000 cash) and financed the rest

Analysis:

The furniture and car purchases have no immediate effect on net worth because the asset increase equals the liability increase. The stock gain increases net worth, while the vacation spending decreases it. Net effect: +$3,000.

When to Update Financial Statements

CFP Board recommends updating personal financial statements regularly:

• At minimum: Annually
• Recommended: Quarterly
• For active investors or major life changes: Monthly

Regular updates allow you to:

• Track progress toward financial goals
• Identify concerning trends early
• Adjust recommendations as circumstances change
• Measure the effectiveness of financial planning strategies