Financial Life Coaching

Lesson Three:

Personal Financial Statements

David Murphy, Ph.D., CPA, CFP®

Introduction:

Luke 14:28-30—

I. Money Basics – Personal Financial Statements

A. Road Map to Success

1. Taking a Trip

a. Destination

b. Starting point

2. Personal Financial Statements

a. Tell where your client is right how (starting point)

b. Balance Sheet

c. Cash Flow Statement

B. Personal Balance Sheet

1. Picture of Financial Position at a Point in Time

2. Items of Value – What You Owe = Net Worth

3. Items of Value = Assets

a. Assets = Cash and other property with a monetary value

b. Common Assets

· Liquid Assets

· Cash

· Cash value of a life insurance policy

· Real estate

· Home

· Vacation property

· Land

· Personal possessions

· Automobile

· Furniture

· Clothing

· Value at market value not historical cost

· Investments

· Assets set aside for long-term use

· Retirement fund

· Education fund

4. What You Owe = Liabilities

a. Liabilities = amounts owed to others

b. Common liabilities

· Current liabilities = liabilities that must be paid within the next year

· Medical bills

· Credit card balances

· Current portion of auto loans

· Current portion of student loans

· Long-term liabilities = Liabilities that do not have to be paid in full until more than one year in the future

· Non-current balance of auto loans

· Non-current or deferred student loans

· Mortgage

5. Sample Personal Balance Sheet

C. Cash Flow Statement

1. A summary of the cash inflows and outflows over a period of time, usually a month or a year.

2. Total Cash Received – Total Cash Outflows = Cash Surplus or Deficit

3. Statement Components

a. Income or cash inflows

b. Cash outflows

· Fixed expenses

· Variable expenses

c. Surplus

d. Allocation of Surplus

4. Sample Personal Cash Flow Statement

D. Analyzing Personal Financial Statements

1. Vertical Analysis

Expenditure Guide for a Family of Four

Gross Annual Income	$ 30,000	$ 40,000	$ 60,000	$ 80,000	$ 100,000	$ 120,000
Deductions from Gross
Tithing	10%	10%	10%	10%	10%	10%
Taxes	2%	16%	20%	24%	26%	28%
Savings	2%	3%	4%	5%	6%	8%
Net Spendable Income	$ 25,800	$ 28,400	$ 39,600	$ 48,800	$ 58,000	$ 64,800
Suggest Expense Percentages
Housing	39%	38%	37%	32%	30%	29%
Food	16%	15%	14%	12%	12%	11%
Transportation	15%	14%	14%	14%	12%	12%
Insurance	5%	5%	5%	5%	5%	5%
Debt	0%	0%	0%	0%	0%	0%
Entertainment	4%	4%	5%	5%	6%	8%
Clothing	4%	4%	5%	5%	6%	7%
Medical Expenses	4%	4%	4%	4%	4%	4%
School & Child Care	5%	6%	6%	6%	7%	8%
Investments	3%	4%	5%	7%	8%	10%
Miscellaneous	5%	6%	5%	10%	10%	6%
Total	100%	100%	100%	100%	100%	100%

2. Horizontal Analysis

3. Debt Ratio

a. Shows the relationship between debt and net worth

b. Lower is better

c. Liabilities divided by Net worth

4. Current Ratio

a. Indicates the capacity of a person to meet their current financial obligations.

b. Higher is better

c. Liquid assets divided by Current liabilities

5. Liquidity Ratio

a. Indicates the number of months over which living expenses could be paid in an emergency arises

b. Higher is better

c. Liquid assets divided by Monthly expenses

6. Debt-Payment Ratio

a. Indicates how much of a person’s monthly income goes to cover debt

b. Most financial advisors recommend a debt-payment ratio of less than 20 percent (excluding mortgage payments)

c. Monthly credit payments divided by Monthly take-home pay

7. Savings Ratio

a. A measure of how much is saved each month

b. The national savings ratio is close to zero

c. Most financial advisors recommend a savings ratio of 10 percent

d. Amount saved each month divided by Gross pay

8. Sample Analysis

a. Facts

· Amount saved = $648

· Current liabilities = $2,000

· Gross pay = $5,400

· Liabilities = $25,000

· Liquid assets = $4,000

· Monthly credit card payments = $540

· Monthly expenses = $4,000

· Net worth = $50,000

· Take-home pay = $3,600

b. Calculations

· Debt ratio = $25,000/$50,000 = 0.50 = 50%

· Current ratio = $4,000/$2,000 = 2.0 = 200%

· Liquidity ratio = $4,000/$4,000 = 1.0 = 100%

· Debt-payment ratio = $540/$3,600 = 0.15 = 15%

· Savings ratio = $648/$5,400 = 0.12 = 12%

B. Problem

Using the following data, prepare personal financial statements and calculate the personal financial ratios.

II. Conclusion

III. Resources

1. Personal financial ratios keep you on track at www.bankrate.com/brm/news/retirement/20071003_personal_finance_ratios_a1.asp.

2. Farrell, C. J. (2006). Personal Financial Ratios: An elegant road map to financial health and retirement. FPA Journal. January.