Preparing Personal Financial Statements Effectively

Financial StatementsWhat do you and Apple have in common? Or, how creating your personal financial statements contributes to your success.

Ok, I’m a CPA.  I can read, interpret, and analyze financial statements.  But did you know that the two most common corporate financial statements—the Balance Sheet and the Income (or, Profit & Loss) statement—apply to you, too? Let’s simplify these two statements and see how their concepts can help your personal finance.

Let’s start with the BALANCE SHEET.  In corporate accounting terms, a Balance Sheet captures the business’ assets and liabilities.  In simple personal finance, this is “what you own” and “what you owe.”  In personal finance, we call this your Net Worth Statement.  It’s pretty much the same for a big company or for you as an individual.  Your assets minus your liabilities equals your Net Worth.  Add up your assets–$10,000 in checking, $100,000 in your retirement accounts, and your home worth $500,000 and your total assets are $610,000.  Add up your liabilities–$4,000 credit card balance and $300,00 mortgage balance and your total liabilities are $304,000. Your personal Balance Sheet, or Net Worth Statement, shows what you own ($610,000) and what you owe ($304,000) and your Net Worth ($306,000).

The INCOME STATEMENT, a.k.a. Profit & Loss or “P&L,” is a more difficult topic because it’s not quite as easy to make the comparison between a business and personal expenses.  The CPA in me says it’s easier to explain the business side.  I’ll try.  We always start with “revenues” or “income,” and then subtract our costs.  We try to break the costs into two categories:  Direct Expenses and Overhead/Administrative.

In company like Inspired Financial, the P&L might look like:


Direct Expenses are the costs of providing our services and consist of salaries paid to our financial planning team.  Our Overhead is all other costs (rent, utilities, software, janitorial, business meals).  In general, Direct Expenses go up as the business grows so as we bring on more clients, we must hire more financial planners (like Leslie who started in September)!  Overhead costs don’t necessarily increase with clients and most businesses seek to tightly control these costs.  Making profits in business is not magic that just happens!  Apple is not profitable just because they have great products.  They must create Revenue (great products do that!), they have to price them right so people can afford them, and they have to control costs.  All these facets contribute to the success of a company and likewise contribute to your financial success.

Let’s see how this works for your personal P&L. I like to break the expenses into Fixed (like your mortgage) and Discretionary (like your latte at Starbucks each morning).

Your personal P&L looks like this:


Nothing fits perfectly into categories so work with me on this.  A house payment or car payment are obvious Fixed Expenses.  I would also put things like Utilities and Insurance in this category.  Yes, they may vary from month to month, but you can’t really say “turn off the electricity this month.”  On the other hand, Discretionary Expenses are those “nice to have” parts of our life that could be trimmed if you chose to do so (or circumstances require it). Things like dining out, clothes, vacation, and the latest electronic gizmo fall into this category. For your personal financial success, you can create strategies and make adjustments in both your Fixed and Discretionary Expense sections.

On the Fixed Expenses, you can put money into your savings or 401(k) every month to contribute to your financial health. Evaluate your insurance periodically to ensure your coverage is adequate and consider increasing your deductibles to lower your premium. Take a hard look at your cable bill and consider how much TV you watch and do you really need 786 channels. Once your car is paid off, redirect the former car payment dollars toward credit card debt or, if you have none (good for you!), save that payment toward the car you’re going to buy several years down the road. Keeping your Fixed Expenses low enables you to save more.

Discretionary Expenses are normally where we have our greatest control issues and one person’s definition of “discretionary” may differ widely from another’s. One way to frame your choices is to think that you can have anything that you want but you can’t have everything that you want. If you can’t choose everything, be sure to choose your anything wisely!

You can build your own Net Worth Statement/Balance Sheet:  what you own minus what you owe.  You are in the driver’s seat to increase your net worth by improving your personal P&L:  keep fixed expenses low, make your discretionary choices wisely, and save the difference! That is a strategy that would made any financial entity—including you—thrive!

Here’s to, and cheers to, your financial success!


  1. 5 October 2016
    Steve Goodno

    Great article!!!!!!
    Evelyn and Beth ( my Beth) have been on my case for years to set something like this up. Being the “I d 10 t”. When it comes to spread sheets, would appreciate some help in siting these up?? Just the template, I would populate with $

  2. 5 October 2016
    tom hamman

    Mark, your varied abilities always amaze me. Plus you make somewhat difficult subjects easy and non-boring. Thank you.

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