In order for you to know where you want to go, you must first know where you are currently. To reach your financial goal, the first thing you must do is figure out where you are. For if you don’t know where you are, you can’t expect to get where you want to go. Knowing where you are means taking an honest inventory of your financial situation—filling out a financial statement—and taking a good hard look at the results. This may sound difficult, and maybe even a bit scary, but it’s a simple process. And if you make up your mind to do it, you’ll be amazed at what you can learn about yourself.

Preparing A Financial Statement

Numbers are like words. Put them together and they tell a story. When you fill out your financial statement, the story the numbers tell will be about you—about where you’ve been, where you are right now, and how to get where you want to go.

Income and Assets

You’ll recall that income can be earned, passive, or portfolio. You work for earned income. Assets that you own generate passive and portfolio income. According to Kiyosaki, in your banker’s version of a financial statement, assets also include doodads. In Rich Dad’s version, assets don’t include doodads. So better check which financial statements are you referring to.

HERE IS A PERSONAL FINANCIAL STATEMENT prepared by Robert Kiyosaki.

In preparing your financial statement, start first with earned income. Earned income is what you earn when you work for your money. It’s income you’re paid for doing a job as an employee, or income you receive as a self-employed person.

Start with your paycheck. Determine whether you’re paid weekly, biweekly, twice a month, or monthly. Fill in your monthly gross income.

Self-employment income. Self-employment income is the income you make working for yourself. Remember, this is income you receive only when you work—it is not income you receive from your business working for you, which would belong under “Business (Net)”

To calculate your total earned income, look at the receipts for bills you’ve submitted to customers or clients over the past month. Is this a typical month for your business? If not, it may be better to add up four months’ worth of receipts, then divide by four (or better yet, add up a whole year’s worth and divide by 12). By giving you an average of your monthly receipts, this will more accurately reflect the income you record on your financial statement.

Passive income and assets

Second, you must examine your passive income. Passive income is income you’ve earned from any asset you own, such as a real estate investment or a business. For your personal financial statement, you need to review each real estate investment property and/or business separately.

Real Estate. What you earn from a rental property is real estate income. You’ll see this listed on your financial statement in the Income section as “Real Estate (Net).” Net means the income you have left over once total expenses for the property are deducted.

Real estate—that is, the property itself—can also be an asset. When determining the value of your real estate for the Assets section of your financial statement, you’ll need to be honest with yourself and enter a fair market value for the property, that is, the amount for which you could sell it today. Remember to get the NET VALUE, that is, the fair market value of the property (appraisal value) less current balance of mortgage (if the property is not yet fully paid). If you have more than one property, do this for each property.

Business. Business income is the income you receive from businesses in which you own an interest, whether they are partnerships or corporations. This is not the self-employment income you listed under “Earned Income”; this is income you receive from your business working for you. You’ll see this as “Business (Net)” in the Income section of your financial statement. Again, net refers to the income you receive once all expenses have been deducted.

A business can also be an asset. When determining the value of your business (or an investment you’ve made in a business) for the Assets section of your financial statement, you’ll have to ask yourself, in all truth, how much the business could be sold for today. Determining the value for your business is hard to do. Probably, you must scout same business for sale to get an approximate value for your business.

Again, to get the NET value, you must less any current mortgage or liability attached to the business from its current value. It’s possible that your net business value is a negative amount. Record the value, whether positive or negative, next to “Business Value (Net)” in the Assets section.

Third is your portfolio Income. Portfolio income consists of interest and dividends derived from investments such as paper securities and royalties from products or services you create.

Interest and dividends are income you earn on investments. To determine your total interest and dividends, look at the statements you’ve gathered for all of your investment accounts. Make sure you add any statements of receivables, that is, money that people owe you. Then for each account, list the monthly income or average monthly income, whether in the form of interest or dividends.

Add together all monthly interest figures and log in that total next to “Interest” in the Income section of your financial statement. Then total all dividend figures and enter that number right below, next to “Dividends.” 

Royalties. Royalties are any income earned from intellectual property you’ve created or you own. The income is usually generated from the sale or license of patents, copyrights, tapes, books, CDs, or oil and gas properties. Look at the AVERAGE MONTHLY royalty.

Doodads. “Doodads” are in the Assets section of your financial statement. If you’ve played the cashflow game, doodads are things you once probably thought of as assets. According to Kiyosaki, because doodads take money from your pocket, they aren’t true assets. Record the current value of each doodad you own, that is, the value if you were able to sell it today (i.e. laptops, digital cameras, mobile phones, cars, etc.)

Now you can total all your doodads. (Later, you’ll record the mortgage or debt related to each doodad in the Liabilities section.)

Rich Dad Tips:

“A banker’s idea of your total assets includes doodads; Rich Dad’s version excludes them.”

“For each liability you have, such as a car loan or a mortgage, you’re an employee of the institution or person lending you the money.”

Expenses and Liabilities. Expenses are not the same as liabilities. The typical monthly amount you pay on a liability is your expense related to that liability. Expenses include monthly payments you make for things such as utilities and food. For simplicity, the term expense includes principal payment along with interest.

Review several months’ worth of all your bills, including bills for credit cards and for doodads like your car and home. If you’re employed, review the deductions on your paycheck; if you’re self-employed, estimate how much you pay for such things as taxes and insurance. The better way to estimate your monthy expenses is to take on the MONTHLY AVERAGE by adding it all up and dividing it for the number of months covered.

Basically what you’ll be doing, as you read on, is recording each monthly expense in the Expenses section of your financial sheet, and recording the related balance due in the Liabilities section.

Rich Dad Tip:

“The reason so many people struggle financially is because every time they make more money, they increase their taxes and their debt.”

Net Worth. Kiyosaki wouldn’t consider your home, car, furniture, clothes, collectibles, or other personal property to be financial assets unless they put money in your pocket. If they take money out, they’re doodads. That’s why you’ll see two versions of net worth in the Liabilities section of your financial statement: the banker version, which includes doodads, and the Rich Dad version, which excludes them.

Remember, the Rich Dad total is the more truthful reflection of where you are financially. Here are the equations for each networths:

Total assets (per banker, with doodads) – total liabilities = net worth (per banker)

Total assets (per Rich Dad, without doodads) – total liabilities = net worth (per Rich Dad)

SO, WHERE ARE YOU NOW in your journey to financial freedom? Did you create an honest, thorough portrait of your financial situation?

Generally speaking, if the money you have coming in as income goes right out as expenses, you’ve got the cash flow pattern of the poor. If your income is used to pay expenses and liabilities, then the cash flow pattern of the middle class best describes you. You’re bringing in money through earned income, which pays expenses and buys more liabilities, which you mistake for assets. You can read more on this cash flow patterns in “What is Financial Intelligence?”

As an end, here is another Rich Dad tip:

“Financial intelligence isn’t measured by how much money you make, but how much money you keep, and how hard that money works for you.”

Source: Robert Kiyosaki’s Coaching Program

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