My clients know that one of the first steps in my financial planning process is creating personal financial statements – specifically a net worth statement. I think that knowing and accepting your current financial situation is a necessary step in the path to making it better. The easiest way to view your current financial situation is to lay out your assets, liabilities and current net worth on a sheet of paper or screen and save it. If you do this every few months, it will reveal patterns about what is going right and what is going wrong in your financial life. I can’t tell you how much people enjoy this exercise and how few people have thought to do this on their own. Occasionally people think they are rich because they live in a 1.5M home, but then they reveal a 1.2M mortgage and 200K in student loans. When the net worth statement is barely positive, it reflects a very different reality.
The other personal financial statement which may be helpful is the household budget (also known as a cash flow statement). Some people don’t use budgets (or don’t need them) because they are responsible with spending and build cash reserves each month after paying all bills and deferring money into retirement plans. Even so, the budget will reveal a lot of information which the advisor can use to craft recommendations. It is standard to run a cash flow statement on a monthly basis because that usually provides an adequate snapshot and many people live on salaries. That said, some business owners will do cash flow on a quarterly or annual basis because their income stream isn’t very predictable from month to month.
When doing a monthly budget, I usually recommend reflecting all the incoming funds on a gross basis (before taxes). Taxes are listed as an expense in the fixed expense portion. After all fixed expenses, there should be a section for variable expenses which cover everything from food and transportation to entertainment and miscellaneous. The variable expense section is often the focus when people are trying to free up more cash for savings and investment.
If you wish to see examples of these worksheets or have other questions about financial planning documents, please don’t hesitate to contact me.
Premier Wealth Advisors, LLC
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
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