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Your Personal Financial Statement

12 August 2010 4 Comments

By Patrick S. Graham

As a Commercial Credit Analyst, I have spent the last 7 years underwriting commercial and real estate loan transactions ranging in size from $100,000 to $100,000,000.  Each of these transactions usually involves a Borrowing entity (LLC, S-Corp, etc.) and an individual guarantor, who will ultimately be held responsible for the loan, should things not go as planned.   Under this typical borrowing structure, I am responsible for analyzing the creditworthiness of both the Borrowing entity AND the individual guarantor to ensure that they posses the proper strength for a loan of their requested size.

For the purposes of this article, I want to focus on how I analyze a personal financial statement.  How does this relate to an individual in their 20s managing their own money? Easy.  It is my hope, that with an understanding of how a bank analyzes a personal financial statement, you will be able to view your own personal financial statement in a new light and use that knowledge to shore up any weaknesses and make improvements in the most important areas.

I start the analysis of every individual by requesting 2 items: 1) A personal financial statement and, 2) the 2 most recent years of tax returns.  Again, for the purposes of this article, we will focus exclusively on the personal financial statement.

A personal financial statement is exactly what it sounds like.  It is a summary listing of all of an individual’s personal assets and liabilities.  The Bank will usually provide a template for the individual to fill out that looks something like this:

Assets Amount in Dollars
Cash – Checking & Savings Accounts $-
Certificates of deposit
Marketable Securities – Stocks / Bonds / Mutual funds
Notes & Contracts Receivable
Life Insurance (cash surrender value – NOT FACE VALUE)
Personal Property (Autos, Jewelry, Art, Furnishings, etc.)
Retirement Funds (IRAs & 401ks)
Real Estate (Est. Market Value)
Other Assets (specify)
Other Assets (specify)
Total Assets $-
Liabilities Amount in Dollars
Current Debt (Credit Cards & Charge Accounts) $-
Notes Payable
Taxes Payable
Real Estate Mortgages
Other Liabilities (specify)
Total Liabilities $-
Net Worth $-

The Personal Financial Statement (PFS) usually has 2 pages.  The first is the summary page and the second gives the individual the opportunity to provide additional detail.  With that in mind, let’s take a look at each of the components of the summary table shown above:

Cash: Cash is the simplest, yet most important aspect of the personal financial statement (PFS).  It is always the first thing I look at and the first thing that my boss will ask me about.  We generally look for an individual to have 5% to 10% of the requested loan amount in liquidity.  Cash and liquidity is a critically important cushion that we look for in case things do not go as planned.  The old saying is more true today than it ever has been, cash IS king.

When analyzing how much cash an individual has, the I WILL include, cash on hand in checking and savings accounts, certificates of deposit, readily marketable securities (stock & bonds), and the cash surrender value of life insurance policies.  These items are easily liquidated and have an identifiable value.

I WON’T include the cash held in IRAs, 401K’s, annuities, and any other retirement vehicle.  Why? Retirement accounts are generally not liquid and therefore are given their own asset category.  If an IRA or 401K account must be liquidated in the event of an emergency, there are significant penalties associated with that action that result in proceeds that are a fraction of the face value of the account.  As such, I do not include retirement accounts in the cash figure.

Notes & Contracts Receivable: Does anyone owe you a substantial amount of money?  If so, you can list this as a note receivable on your PFS.  But, from my perspective, I don’t really care who owes you money or how much.  Why?  Because I have no idea if they are ever going to pay you back.  I can’t count on it so I generally exclude this in an adjustment process, which we will get to later.

Personal Property: Personal property includes all of your “stuff.”  Most of the time, this usually includes: cars, boats, planes, art, furniture, etc.  It is tough to place a value on a lot of these things so we generally just ask for your best estimate.  Unless there is something with significant value in this line item (rare artwork or a Gulfstream Jet), I generally exclude it as well. Why?  2 reasons: 1) It isn’t liquid, and 2) even if you do sell it, in most cases you won’t get anywhere near what you paid for it.  In addition there are significant costs to getting rid of your “stuff” like brokers fees, auction fees, and most importantly, time.  Again, I exclude this in the adjustment process.

Retirement Funds: Retirement funds include IRA’s, 401K’s, and Annuities.   I will always include the value of an individual’s retirement savings in my calculations, but caution against relying upon them as a source of repayment because there are significant penalties for liquidation.  If I need to calculate a liquidation value, I generally assume a 10% early withdrawal fee and ordinary income tax on the proceeds.  For example, someone who has $10,000 in an IRA and has a 28% tax-bracket, would realize approximately $6,480 in proceeds from liquidating their account ($10,000 *.9 = $9,000 * (1-.28) = $6,480).  All in, that is a 35% penalty!

Real Estate: As the category title would indicate, real estate includes all real estate owned by the individual filling out the PFS.  If I have the opportunity, I always ask them to divide their real estate into 3 categories if necessary: 1) Personal Residence, 2) Secondary or Vacation Home, and 3) Real Estate Held for Investment.  This allows me to see where their real estate holdings are concentrated.

Again, we ask for the individual to provide their best estimate of value when it comes to their real estate, but we recognize that if they purchased the property from 2005 – present, it has likely declined in value.  As such, I will always double-check the stated value of the home against a recognized valuation source such as Zillow.com or the county tax assessment.  Usually, I find that the individual has overstated the value of their home, sometimes significantly, and I will have to make adjustments later on.  So, if you are a homeowner or if you own investment real estate, be as honest as you can when estimating value.  Real estate is a hard asset with some value, and I will always include it in my calculations, but will always double-check the values and make adjustments where necessary.

Other Assets: If you have any other item of value that has not been covered by the categories above, you can place it here.

Adding up the all of the above items results in a number that is your total assets, but this is only half of the picture.  Now let’s look at liabilities:

Current Debt: Current debt is anything you owe that is due in less than 1 year.  Typically this would include credit cards, short-term loans, and demand lines of credit (like HELOCs).  I like to see them listed individually so I can compare against assets if necessary.

Notes Payable: Do you owe money to any individuals or unsecured parties?  If so, list it here and be sure to include the repayment terms because these types of loans don’t t show up on your credit report.

Taxes Payable: This category includes all taxes payable.  Typically, this includes any income and property taxes payable.

Mortgages Payable: If you own a home and have a mortgage against it, this is the place to list it.  If an individual owns multiple properties, I like to see the mortgages listed individually so I can compare them against the corresponding asset to make sure that they don’t owe more than a property is worth.

Other Liabilities: If you owe any money in any capacity not listed above, be sure to include it in this category.

Once the liabilities are summed up and subtracted from the total assets, we arrive at the individual’s net worth.  Once the net worth is obtained, I begin the adjustment process.  All I am doing here is taking the net worth figure and backing out any assets that don’t have an easily verifiable value or are not easily liquidated.  To see this in action, lets look at a typical example in the table below:

Assets Amount in Dollars
Cash – checking accounts $12,500
Certificates of deposit $0
Securities – Stocks / Bonds / Mutual funds $0
Notes & Contracts Receivable $500
Life Insurance (Cash Surrender Value) $15,000
Personal Property (Autos, Jewelry, etc.) $40,000
Retirement Funds (eg. IRAs, 401k) $75,000
Real estate (Est. Market Value) $750,000
Other assets (Specify) $0
Total Assets $893,000
Liabilities Amount in Dollars
Current Debt (Credit Cards & Charge Accounts) $40,000
Notes payable (Describe Below) $0
Taxes Payable $25,000
Real Estate Mortgages $600,000
Other Liabilities (Specify) $5,000
Total Liabilities $670,000
Net Worth $223,000
LESS:  Notes Receivable ($500)
LESS:  Retirement Accounts ($75,000)
LESS:  Personal Property ($40,000)
LESS:  Adjustment for real estate values ($250,000)
Adjusted Net Worth ($142,500)

Granted, I made these numbers up, but they are fairly representative of many of the statements I see.  On the asset side, the Individual will usually have a little bit of cash, a little bit more in retirement savings, and most of their asset base tied up in the value of their house.  On the liability side, there is significant credit card debt, some taxes due, and a big mortgage.

In this example, I make adjustments by backing out the value of notes receivable, retirement accounts and personal property.  I also make an equity adjustment on the home when I discover that it has a current tax assessed value of $500,000.  Guess what?  After these adjustments, the individual’s net worth falls from $223,000 to ($142,500)!  Why?  Because their house has declined in value and the majority of the rest of their assets aren’t liquid!

What To Learn From This Example

Now we get to the point of this entire article.  What can a 20 year old learn from my 7 years of analyzing financial personal financial statements?  Here are the major takeaways:

1.  Cash and liquidity are critically important.  In my opinion, I think it is wise to build up an emergency fund of AT LEAST 6 months worth of expenses before you even think about beginning to save for retirement or for a house.  Financially speaking, you never know what unexpected turns life is going to take, but they can always be made a little bit easier if you have some cash on hand for emergencies. Need quick cash? A Fast Cash Online Payday Loan from MyPaydayLoanCash.com will get cash directly into your account within 60 minutes.

2.  In the long run, your “stuff” will come to own you.  I really can’t stress this point enough because there is so much waste involved in the purchase and disposition of “stuff.”  In our example above, there is $40,000 in personal property listed, but the value is eliminated in the adjustment process.  There just isn’t very much value there.  Your “stuff” takes up room in your apartment, is a pain to move from place to place, and if you had to sell it, you will never get back what you paid for it (except in rare cases).  Keep the stuff to a minimum! Stay lean and use excess cash to build up your emergency fund, not buy that MacBook pro you have been checking out.

3.  Keep retirement saving in perspective. Saving for retirement is the basis of nearly all of the financial advice out there today and I acknowledge that it is a vital component of managing your personal finances.  BUT, saving money for retirement IS NOT the same as building up a cash cushion for emergencies.  There are significant costs to liquidating your retirement savings, which many people have to do in an emergency.  In my opinion it is wise to build up a minimum of 6 months worth of expenses FIRST and then start saving for retirement.

4.  Home ownership is not all it is cracked up to be. I realize this may be a controversial statement given that home ownership is the foundation of the American Dream, but I think many people enter into the purchase of a home unprepared for the demands of owning and maintaining it.  Much like a share of a stock, home prices can change drastically and since this is the single biggest purchase many people will ever make, it can have a significant impact on your net worth.  In my example above, the individual paid $750,000 for their home and got a $600,000 mortgage (80%).  But, the home has declined in value by $250,000 and wiped out all of their net worth.  Now they are underwater and don’t have the cash resources to make up the difference if they had to sell it.  This can ruin someone financially.  You must be properly prepared for the purchase of a home and can’t rush into it.  My advice on home ownership is to WAIT!  Don’t think of owning a home as an investment, think of it as a place where you live, a place to eat and sleep, and a place to spend your down time.  Yes, over the long run home prices tend to go up, but ask anyone who bought a home between 2004 and 2008 if they would do it again and I think you might find that they regret their decision.  Unless you are 100% positive that you are going to stay in a particular area for 7+ years, I would tell you to rent.  Use any excess cash to 1) fill your emergency fund, 2) save for retirement, 3) save for a house.

I hope you found this article insightful and informative.  If you have any questions or would like to argue any of the points above, feel free to email me at PatrickGraham33@yahoo.com.

Kevin’s note: Now this is an example of a quality guest post!  If you want to be published here, take a look at this quality article and read this page.


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  • DLS said:

    Great article. So much awesome information boiled down. Now I know what the banker is looking at…what OZ does behind the curtain. Thanks so much. I feel smarter and much better prepared.

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  • Marilyn said:

    This is a great article as it gives all the information one needs to fill out a financial statement. I'm filling one out currently as I am buying another investment property in the name of a corporation so for the first time I have to do this. One comment about home ownership – as an experienced Realtor, I unfortunately concur with your statements about home ownership. It isn't for everyone right now for the exact reasons you stated – too many buy with nothing to fall back on if someone loses their job or they must sell quickly due to job transfers,death,divorce, etc. Thus the value of a significant amount of cash on hand and as little debt as possible.