Personal Financial Statements

PFP Chapter 2

Personal Financial Statements

Personal Balance Sheet shows how much wealth
you have accumulate
Personal Income and Expenditure Statement
indicates how much you have saved in the previous year

These two statements together allow you to:

Assess your present financial standing;
Compare your current financial position with your
desired goals;
Track changes in your financial position over time

Personal Financial Statements

Cash Budget helps to manage future
expenditures so as to spend within your means
and increase your net worth over time
It is a detailed short-term financial forecast of
your income and expenditures

Balance Sheet

Measures financial standing at a particular date (snapshot)

Assets that have market values are recorded and that they are
recorded at current fair market value
Liquid Assets, Financial Investments (includes CPF savings), Real
Properties, Personal Properties

Liabilities
Current Liabilities, Long-term Liabilities (only record the principal
outstanding and not the future
interest
owing*)
*Interest expense
for the
current year should be recorded separately in
the income & expenditures statement

Net Worth = Assets Liabilities

It is possible to have many assets yet have a low net worth simply
because your assets are financed primarily with loans

Income & Expenditure Statement

Measures the change in an individuals financial position over a period of time

Recorded on a cash basis

Three components
Income, expenditures, cash surplus (or deficit)

The cash surplus (or deficit) has a direct impact

on your net worth in the balance sheet

Financial Ratios
Solvency Ratio = Net Worth/ Total Assets
The probability of becoming bankrupt
Higher the ratio; Stronger your financial position
As you reach retirement, your solvency ratio
should converge to 1.0 (debt-free)

Financial Ratios
Liquidity Ratio = Liquid Assets/ Total CL
Measures ability to pay off short term debt in the
event of unemployment
Should be above 1.0
Advisable to maintain at least 3-6 months of
emergency fund

Financial Ratios
Savings Ratio = Cash surplus / (Gross) Income
Measures the proportion of your income saved in
a year
Positive means saving; Negative means
overspending
How much to save depends on your ultimate goals

Financial Ratios
Debt Service Ratio =
Total annual CASH loan payments / Annual
Income
Numerator excludes CL other than loan obligations
Measures the ability to service loan payments in a
prompt and timely fashion
Smaller the ratio; Better is your ability
Ratio > 0.4 means that you are too highly
leveraged and may encounter difficulties in serving
your loan obligations in the future

Financial Ratios
Gearing Ratio = LT debt / Total Assets
Measures how much leverage you have
undertaken to acquire your assets
Higher the ratio, higher probability of bankruptcy

Retirement Planning
PFP Chapter 15

Steps in Retirement Planning

Step 1: Set your retirement goals
When to retire and the SOL you wish to enjoy during
retirement
Amount of fund needed: % of last drawn pay for first year and
rise with inflation, or based on current level of HH expenses
and compound them forward at long term inflation rate

Step 2: Estimate your available financial resources

Step 3: Estimate the shortfall of funds
Step 4: Formulate your investment/ savings plan
Strategy will depend on investment horizon and risk
tolerance