What’s on your PFS?

As a banker, I’ve seen some very bright people butcher a personal financial statement (“PFS”). In finance terms, the PFS is an individual’s or couple’s balance sheet.

A balance sheet is called such because both sides of this equation must equal, or balance: Assets = Liabilities + Net Worth (another name for Net Worth is Equity). It is a snapshot-in-time picture of an entity’s financial health; the more positive the net worth, the better.

Basically, a PFS lists what you own and what you owe. If you’ve ever filled out a standardized home mortgage application, you have completed a PFS, you just may not have known it.


What You Own

The “What you own” side of the PFS includes your all your assets, i.e., things of value. “Value” can be subjective. So, it’s important we find objective sources to assign a market value to our things.

Let’s look at the most common asset categories.

1. Cash – No asset is more accurately valued on a PFS than one’s cash (checking and savings accounts, and, if you’re a conspiracy theorist, the dollar bills in your gun safe).

2. Financial Investments (e.g., stocks, bonds, mutual funds, annuities, etc.) – Under this category are two important sub-categories:

A. Non-retirement vs. Retirement – Non-retirement assets are more “valuable” than retirement assets. My 401k statement may say $25,000, but taxes and early withdrawal penalties make it really worth $19,000 (or less) in a crisis. Non-retirement accounts are only subject to capital gains taxes.

B. Publicly-traded vs. Privately-held – I know I could sell my Valero stock this afternoon for about $40 a share. But most companies are not listed on a “public” stock exchange like New York or Nasdaq. These startups or family businesses have a much smaller pool of buyers, if any at all.

Publicly traded investments held in non-retirement accounts are almost like cash with the caveat that they are more volatile.

Other financial assets, like ownership in a privately-held company, are harder to value and even harder to turn into cash. A CPA familiar with your industry can help assign a “potential” market value to your business.

3. Real Estate – Primary homes comprise the bulk of most people’s real estate assets. Estimating what your home and other real estate (rentals, land, etc.) would sell for is almost as hard as predicting what your business would sell for. We are emotionally invested. We know how much work we’ve put into them.

A place to start is the tax value. Then, you can compare recent neighborhood sales. But only a market appraiser can apply relevant adjustments to arrive at a “probable” market value.

Ultimately, an asset is only worth what someone is willing to pay for it at a given time. Under duress, things sell for less.

Therefore, be conservative in your value estimates of real estate and “personal items” like autos, jewelry and art. Your banker will be impressed by your restraint and your family will have a more accurate picture of their status should a worst case scenario occur.


What You Owe

Now for the “what you owe” side of the PFS, also known as Liabilities.

As a general rule, liabilities (debts, loans, etc.) are easier to get into and harder to dispose of than assets. It takes years to build a business that’s worth $200,000. It takes only a few signatures to get into the same amount of education debt.

One bad year can erase the business’ $200,000 value. The education debt will stick with you like a faithful spouse – through good years and bad.

Once, when my family was growing and we needed a larger vehicle, I was so proud that my good credit had gotten me a long repayment period and, therefore, a low monthly payment. Then, imagine my horror four years later when my french fry-encrusted vehicle was worth far less than the loan balance.

While assets can be tricky to accurately value, it’s easy know to know the “value” of your debts; your lenders are tracking them quite closely. What’s hard is remembering what debts we have!

“Oh, right. I did pay for those fillings with Care Credit.”

“What? Did we put the washer and dryer on the Big Bank credit card?”

“Have we paid off the ‘new’ couch yet?”

Common household debts can be separated into two key categories: secured vs. unsecured.

Secured debts have assets pledged to them that the lender could sell if the debt is not repaid (a situation called “default”). These pledged assets are known as collateral.

The most common secured debts are: vehicles and other big boy toys; houses and other pieces of real estate property; and big-ticket consumer furnishings that go into houses.

The most common unsecured debts are credit cards, education loans and personal or “signature” loans.

These unsecured loans tend to have higher interest rates to compensate the lender for the risk of not having assets to sell in case of default. An exception might be education loans that are subsidized or guaranteed by the federal government.

Two sub-categories of secured debts are those attached to appreciating assets vs. those collateralized by depreciating assets. Appreciating assets, like a home in a healthy neighborhood, gain value as the years progress. A sports car, a depreciating asset, loses value by the mile.

Generally speaking, loans secured by assets growing in value are wiser financial decisions than loans secured by depreciating assets. But at least the latter are backed by something you can sell if the sky falls. A PFS of unsecured consumer debts is the fastest way to financial ruin.


Your Net Worth

Then comes the all important subtraction. If the combined, legitimate, real-world value of one’s assets is greater than the sum of his or her debts, net worth is positive. If the debts are greater, it’s negative.

The sooner a family can get to a growing, positive net worth, the better equipped it will be to provide for landmark expenses like college educations and retirement.


Kevin Thompson is the Boerne Market Manager for Centennial Bank. He can be reached at kevin.thompson@bankoncb.com.

1 Response to “What’s on your PFS?”


  1. 1 Alex OBrien November 6, 2013 at 23:56

    Good article. Hope all is well and hope your b ball game is strong!


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