Step #1 - Retirement Preparedness Checklist: Create Personal Financial Statements

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Personal financial statements serve several very important functions: 1) they tell you where you are; 2) They are a starting point for mapping out where you want to go; and 3) They let you know whether or not you are on course along the way.

Personal financial statements are made up of two documents: an income statement and a balance sheet. 

The income statement reflects your sources of income and where all you spend that income. The difference between your income and expenses is money that is, available to save. 

Divide expenses into two categories: non-discretionary and discretionary. Non-discretionary expenses are the items you have to pay each month - mortgage, groceries, insurance etc. Discretionary is everything else.

The balance sheet is a tally of your assets and liabilities. Assets are things you own. Liabilities are things you owe. 

Assets include things like equity in your home, savings accounts and 401(k) balances. Liabilities include mortgages, student loans and credit card balances. The difference between your assets and your liabilities is your net worth.

The first step in creating a set of personal financial statements is tracking your finances. This is a lot easier to do if you do it on an ongoing basis rather than going back and trying to organize a year or two's worth of statements and receipts.

When your personal financial statements are complete, then you can really get into the nitty-gritty of retirement planning. Without them, you are just throwing darts.

Personal financial statements allow you to get intentional about where you spend your money. And being intentional is the key to being financially successful.

On their own, personal financial statements only tell you where you are and where you have been in the past. But their power, for retirement planning purposes, is to use them as a starting point to project the costs of retirement. 

The free, retirement planning web application, available at SniderAdvisors.com, allows you to enter your income statement and balance sheet information and then model and store various future income and expense scenarios. 

These numbers are the inputs needed to answer the critical retirement questions: "How much money do I need to be able to retire?" and "When will I have that much?" In fact, our retirement planning web app will calculate both of those for you, based on your inputs.

The ability to create alternative scenarios also allows you to answer my favorite question - "What if?" 
Once you get started, I think you will be surprised at how easy it can be and how much you can learn and affect just by having the numbers in front of you.

So, while you might think of personal financial statements as being about as exciting as watching trees grow, remember, they are essential tools for making your money grow.