Personal Financial Planning: An "How-To" Guide (part 12)

Using Your Personal Financial Statements

by

Charles Lamson

Whether you are just starting out and have a minimal net worth or are further along the path toward achieving your goals, your balance sheet and income and expenses statement provide insight into your current financial status. You now have the information you need to examine your financial position, monitor your financial activities, and track the progress you are making toward achieving your financial goals. Let us now look at ways to help you to create better personal financial statements and analyze them to gain a more thorough understanding of your financial situation.

Keeping Good Records

Although recordkeeping does not rate high on most "to-do" lists, a good recordkeeping system helps you manage and control your personal financial affairs. With organized, up-to-date financial records, You will prepare more accurate personal financial statements and budgets, pay less to your tax preparer, not miss any tax deductions, and save on taxes when you sell a house or securities or withdraw retirement funds. Also, good records make it easier for a spouse or relative to manage your financial affairs in an emergency. To that end, you should prepare a comprehensive list of these records, their locations, and your key advisors (financial planner, banker, accountant, attorney, doctors) for family members.

Prepare your personal financial statements at least once each year, ideally when you draw up your budget. Many people update their financial statements every 3 or 6 months. You may want to keep a ledger, or financial record book to summarize all your financial transactions. The ledger has sections for assets, liabilities, sources of income, and expenses; these sections contain separate accounts for each item. Whenever any accounts change, make an appropriate ledger entry. 

Organizing Your Records

Your system does not have to be fancy to be effective. You will need a bank safe-deposit box, a ledger book, and a set of files with general categories, such as banking and credit cards, taxes, home, insurance, investments, and retirement accounts. An expandable file, with a dozen or so compartments for incoming bills, receipts, pay stubs, or anything you might need later, works well.

Start by taking an inventory. Make a list of everything you own and owe. Check it at least once a year to make sure it is up to date and to review your financial progress. Then record transactions manually in your ledger or with financial planning software. Exhibit 1 offers general guidelines for keeping and organizing your personal financial records.

Click to enlarge.

You will want to set up separate files for tax planning records, with one for income (paycheck stubs, interest on savings accounts, and so on) and another for deductions, as well as for individual mutual fund and brokerage account records. Once you set up your files, be sure to go through them at least once a year and throw out unnecessary items.

Smart.sites Need help getting organized? You will find advice for every area of your life at www.organizedhome.com.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005,  LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 67-68*

END

Smart.sites

Need help getting organized? You will find advice for
every area of your life at www.organizedhome.com.