Blog | Real Estate

How to Read your Personal Financial Statement

It’s time to take the ‘numb’ to of numbers and learn how to analyze the lifeblood of any investment

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It’s time to take the ‘numb’ to of numbers and learn how to analyze the lifeblood of any investment

All too often, women tell me that the one thing holding them back from moving forward with investing is their math skills — or lack thereof, to be more precise. I truly believe so many women have been brainwashed into thinking that we are not good with numbers. Gender stereotypes beginning in grade school pushed girls toward reading and writing, while steering boys toward math and science.

While there are many problems with this methodology, here’s the one that most concerns me: Money is a life skill. The fact that it’s not taught in most schools today tells you something about how we are failing our children — we simply aren’t preparing them for the real world.

Money and finance are all about numbers. They tell us how well we are managing our household, running our business or career, and investing our money. If you intend to be financially fit and achieve financial independence, then you’ve got to become very comfortable with numbers. And it doesn’t even need to be complicated — in order to be able to read your personal financial statement, you just need to know how to add, subtract, multiple and divide.

Understanding your personal financial statement

If your eyes glaze over when you look at numbers, or your husband currently handles all your finances, then it’s time for a crash course in financial statements. After all, the numbers of an investment are anything but boring, if you know what to look for. The numbers are the life blood of an investment. They are alive. They paint a picture of what was and what is. By creatively playing with numbers, you can paint the picture of what will be.

Below is a personal financial statement template you can download for your own financial journey.

personal financial statement image
Download a copy of the Rich Dad personal financial statement here.

If you have ever played our game CASHFLOW®, it might look familiar to you. The personal financial statement template within the board game has helped millions of people around the world finally understand where there money goes every month.

Referencing the personal financial statement above, notice the following three components.

  1. Income Statement

    This is a record of the Income (money flowing in) and Expenses (money flowing out) for a specific time period (a month, quarter or year typically).

    Income. Whether you earn ordinary income from your job, acquire portfolio income like stock dividends or make money with passive income through cash-flowing assets, you want to add it to the income section of the Income Statement.

    It's also worth noting that each type of income mentioned above (ordinary earned, portfolio and passive incomes) is taxed differently greatly affecting your take home pay.

    Expenses. Unlike a lot of financial experts, we're not going to tell you to freeze or (worse yet) cut up your credit cards. Before we give you advice on what to do with your credit cards, it's important to know exactly where your money goes first.

    The next section of the personal financial statement template is for your expenses. This section is where you include anything that you pay for on a monthly basis such as your mortgage or rent, car payment, food, utilities and yes, your credit card payments.

    You may be tempted to exclude smaller expenses like the $10 a month gym or Netflix payment. But remember, the purpose of this exercise is to help you get a better understanding of where your money goes every month. If you find your bank account less than desirable, it's probably because you don't have every dollar accounted for. Regardless of how you make your money, it's important to know how much you're spending on expenses.

  2. Balance Sheet

    This is a register of Assets (things that put money in your pockets) and Liabilities (things that take money out of your pockets, aka debt). It’s called a balance sheet, because the two sides must always add up to the same amount.

    Assets. Robert's rich dad always defined an asset as anything that puts money your pocket whether you work or not.

    Many people think their job is an asset. But if you stopped working, you wouldn't continue to make money. So a job doesn't really fit our definition. Neither does owning something tangible like vintage cars or big houses. Though they might be worth more than when you purchased them, they don't put money in your pocket. Those are considered doodads or liabilities.

    Liabilities. Where an asset is something that puts money in your pocket, a liability is something that takes money out of your pocket.

    Even if you have your McMansion or S-class Mercedes paid off, we still wouldn't consider them to be assets. Why? Because you still have payments to consider like upkeep, insurance, and maintenance costs.

  3. Statement of Cash Flow

    This shows you the cash coming in, the cash going out, and the remaining cash at the end of a specific time period.

A word about debt

Unlike a lot of financial experts, we're not going to tell you to freeze or (worse yet) cut up your credit cards. Before we give you advice on what to do with your credit cards, it's important to know exactly where your money goes first.

Most financially uneducated people view debt as a four-letter word. We have been conditioned to think that all debt is bad. We’ve been taught to fear debt. But not all debt is bad. There is good debt, too. In fact, getting into good debt will most likely be part of your plan to financial independence.

How does it work? Debt becomes good or bad based on how the money is used. If borrowed money is spent on consumption — such as a vacation, jewelry or new shoes you charge to your credit card — then that’s bad debt. The car loan you write a check for each month is also bad debt. Debt becomes good or bad depending on who pays for it. Bad debt is debt that you pay for out of your own pocket.

Good debt, on the other hand, is debt that someone else pays for you. For example, our tax strategist, Tom Wheelwright, borrowed money to grow his business in its early years. That debt was paid back out of the positive cash flow of his business. Similarly, when you purchase a rental property, you will most likely have a mortgage or loan on the property. If you manage the property well, then the rent from the tenant pays the monthly mortgage payment — another example of good debt.

How Robert and I use debt to our advantage

In 1973, Robert took a real estate investing course in Hawaii. He began looking for rental properties in Hawaii that would give him positive cash flow. He was amazed at the resistance he received from the real estate agents he approached. “You cannot find those kinds of deals in Hawaii,” they told him. “Hawaii is too expensive.” The problem with their advice was that they were real estate agents, not real estate investors. Robert persisted and finally found a broker who knew exactly what he was talking about and who had cash-flowing rental properties to show him.

Robert flew to Maui where the properties were located, steps away from beautiful sandy beaches. The condominiums were selling for only $18,000 each (ahhh, the good ol’ days!). Robert went through one of the properties, reviewed the numbers, and was told he needed a down payment of 10 percent, or $1,800 to purchase the property. What did he do? He pulled out his credit card and charged $1,800 to his Visa. Now, most credit-card debt people accumulate is bad debt — dinner at trendy restaurants, new tires for your car, or a new lamp for your living room — but in this case, Robert’s credit-card debt was good debt because every month the income from that rental property paid for the debt and the expenses of the property.

When borrowing money to purchase an asset, such as a business or a real estate property, the question to ask yourself is: How can I get the best financing terms possible? Financing terms include things such as the interest rate, the length or term of the loan, the cost of the loan, and penalties for paying off the loan early. Debt service is often your greatest expense and can be the difference between positive or negative cash flow.

Putting these numbers into action

Now that you have a cheat sheet of these important terms and their definitions, it’s time to analyze a few investment deals to see how the numbers shake out. Pages 137-143 in my book, It’s Rising Time will walk you through several scenarios and how to properly assess their financials.

If you’re serious about taking action on your financial dreams, then this is the perfect place to start. And remember: Each number is a clue that helps you find the truth about an investment opportunity. There’s no reason to feel “numb” by the process. The more exposure you have to these numbers, the more comfortable you will become finding and using them.

Original publish date: January 04, 2019

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