Personal Financial Statements
Personal financial statements - the statement of financial position (net worth statement) and the cash flow statement - are the diagnostic backbone of planning. The net worth statement lists assets (cash, investments, property, pensions) and liabilities (mortgage, loans, credit cards) at a point in time: Net worth = Assets − Liabilities. The cash flow statement records income and expenditure over a period: Surplus (or deficit) = Income − Expenditure.
Candidates must classify items correctly. Current assets are liquid (within 12 months); fixed assets are longer-term. A pension is an asset but usually illiquid. The mortgage balance is a liability, not an expense - the interest and capital repayments appear in cash flow. Confusing stock (net worth) with flow (cash flow) is the most common trap.
Other traps: double-counting an asset and its income; treating a car as a liquid asset; forgetting contingent liabilities such as guarantees; and omitting tax liabilities accrued but unpaid.
Worked example: Client has cash £10,000, investments £80,000, home £300,000, mortgage £180,000, credit card £5,000. Net worth = (10,000 + 80,000 + 300,000) − (180,000 + 5,000) = £205,000. Her monthly income is £4,500 and expenditure £4,000, giving a surplus of £500 per month. The surplus funds the plan; the net worth measures resilience.
Rule of thumb: net worth is a snapshot (stock); cash flow is a movie (flow).