The most important document to have in your older part of life is known as a Financial Statement. A financial statement is your financial report card that you work on during your life after graduating school. It allows to keep you updated on your financial well-being. No one explains this concept better then Robert Kiyosaki in his famous book Rich Dad, Poor Dad.
There are 3 elements that make up your financial statement: Income Statement, Balance Sheet, and Statement of Cashflow. Here is the link to the Rich Dad Company website on financial statements and how I learned (https://www.richdad.com/personal-financial-statement-template). Another resource from the Rich Dad Company where you can download a better picture of a financial statement from Robert Kiyosaki’s board game CashFlow can be found here: (https://www.richdad.com/resources/tools)
Income Statement: Income and expenses are included in this section.
Income (Liquid)
Also can be referred to as revenue. Money earned from a job or side hustle, checking/savings/money market account interest, stocks/dividend payments, bond interest, CDs, selling goods or services, or assets that produce money (rental real estate) can be categorized under this class.
Liquid means the ease of being able to convert any forms of income into legal tender (currency).
Expenses
This is the debts or money owed from something you paid for that are typically required to be paid within a month. Credit card bills, housing bills (heat, electric, water, gas, sewer), cell phone bill, rent/mortgage, loan payments, and internet/cable bill are examples. This is where most people focus their attention on when trying to get more money by focusing on budgeting. Click here for a budget template on Google Documents.
Balance Sheet: This includes your assets and liabilities. It is a balance sheet because they should be equal in amount.
Assets (Illiquid)
These are items that have true monetary value. Retirement accounts (401K/403b, IRAs, Keogh, pension, annuities), a house/real estate, commodities, or a business fall under this class.
The biggest aspect I have picked up from Robert Kiyosaki on this topic is his definition of an asset is something that pays you monthly. A strong and consistent argument I hear from Robert is that “a house is not an asset” along with some growth stocks that don’t pay any dividend. Those examples contain equity that necessarily cannot be converted into money unless the asset is sold off. This will be further exampled in another article on difference between capital gains and cashflow.
The illiquid term refers to having increase difficulty converting the asset into cash. Think of this like your house or that growth stock not paying you a dividend; there is equity in that asset that cannot be used unless sold, refinanced on, or loan against the asset.
Liabilities
This is debt, usually in the form of a loan, where money is owed to another person or entity. A mortgage or any kind of loan (home equity loan, student loans, car loan, policy loan) are examples.
Statement of Cashflow
This is a portion of the financial statement that incorporates the Income Statement and Balance Sheet to show whether you are making a positive or negative amount of money per month.
All types of monthly income (salary from a job or business, investments, dividends, rent from real estate) minus the monthly expenses gives you monthly cashflow. When the number is positive, that means you are making more money than you spend per month. When the number is negative, that means you are spending more money than you make per month.
One of the core lessons of being successful with money is making more money than you spend. If that is not happening in your life currently, then look no further then solving this issue. This is done and preferred to be completed in this order; 1) increasing your income 2) decrease your expenses. That is it; it is that simple. This is the essence of becoming financially free. When you understand and have a well-documented financial statement, you are on your way to becoming financially free. And as always,
To the New World and the New You, much success in finding your financial freedom.