Personal Finance Statements

One of the main goals I want to accomplish with Bridge Financial Planning is to take away the stress and reluctance many people have of starting a plan for future financial success. We’ve discussed setting goals and priorities and tackled a high level budget guide, but this post is more about the tactical side of the process, along with some basic reports you can use to measure your progress against your goals.

Two valuable statements to produce are the Income Statement (Budget) and Balance Sheet (Net Worth Statement). By monitoring these two simple calculations, a clear picture of your progress emerges.




Income Statement  = Income – Expenses

It’s simply your budget. You’ve already done the hard part by evaluating past habits and identifying opportunities for implementing a way of aligning your spending with your goals.

After you’ve identified ways to decrease expenses, what else can be done to increase the income side of the equation? Once that’s done, it’s locked in much more securely than expense management. With expense management, it has to be repeated over and over to have the same effect.

The main goal for this statement is to assign a goal to each dollar earned. It could be for recurring obligations like rent/mortgage, car payment, utilities, etc. Or, it could be for a savings goal.

Recently, I’ve worked with several business owners and contract workers that have ‘lumpy’ income. They may have good annual income overall, but the income flows in inconsistently.

If that’s the case for you, it’s even that much more important to have a good plan in place. Without it, you may be tempted to put expenses on a credit card and incur unnecessary interest expenses. It’s also even more important to set aside funds for future payments and savings goals.


Balance Sheet = Assets – Liabilities

This is your net worth statement. The net worth statement really should be set at the top of the personal finance pedestal! It’s too easy to look successful with a lot of assets, but lose sight of the corresponding liabilities. The net worth statement keeps everyone honest.

The goal with a Balance Sheet is to increase assets and/or reduce liabilities. The higher your net worth, the closer you are to achieving your long term financial goals.

Once you have your Income Statement and Balance Sheet in place, you’re in a great position to develop a cash management plan.


Cash Management Step-by-Step

The first step is to establish an Emergency Fund. For a household with two income earners, the target amount should be 3 months of living expenses. If you are on your own, or in a household with one income earner, there is less financial ‘wiggle room’, so it’s best to have 6 months of living expenses available in the event of an emergency.


What is a valid use for an emergency fundI get that question a lot and the best way to describe it is that it is an expense that cannot be anticipated. Home repairs, car maintenance, holidays, vacations, etc. do NOT qualify as emergencies! An unexpected medical emergency or loss of work are the most common kinds of emergencies. It may even be for paying a deductible on home damage due to a natural disaster, or an auto deductible due to an accident. Common characteristics are that it is typically a larger expense and it is always unexpected.


By having an emergency fund, you’re able to stay on track with other financial obligations during the crisis and reduce the stress during an already stressful time.


The most effective way to manage cash is to automate a lot of the decisions. Start with what you know you’ll be spending: mortgage/rent, car payments, student loans, utilities, etc… Set up auto pay for these expenses. You have to pay them anyway – why worry with them?


Next, look at your savings goals. Determine how much you need to save on a regular basis to achieve your long term goals (this is something your financial planner can help you with). This could be for retirement, vacation, future home purchase, your kid’s education, or whatever else is on YOUR list.


The retirement savings is probably the easiest to automate if you work for a company with a retirement plan – it’s often set up as a tax advantaged salary deferral. A 401k account is the most common, but there are many options.


For other long term savings you may consider starting a savings account at an online bank that’s not directly tied to your checking account. Use that savings account to collect automatic deposits to fund your long term goals. That prevents the immediate temptation of transferring funds to spend too easily.


The remainder is yours to spend for whatever purpose you want – guilt free.


This process takes a bit of trial and error. It may take a few months to see trends and patterns that help develop a more consistent plan. Keep at it. It will be worth it!


2015-03-02 21.08.57 A guest post by Jennifer Harper, MBA, CFP, Founder and Director of Bridge Financial Planning, LLC, providing fee-only financial planning & investing for today’s professionals. She is also the founder of Common Cents Financial Literacy, Inc., a non-profit organization dedicated to providing financial education, focusing on ages 16-22.




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