Here are some reader suggested articles: How to Make Money Online From Your Dorm Room Blogging Is Submitting Your Articles to BloggingZoom a Good Idea? Makes Ends Meet, and Then Some Whateverlife.com is a Prime Example of How to Make Money Online Are You Blogging to Make Money, or Are You Blogging to Become Rich? Part 1

How are your personal finances? Pretty good you say? How well are your finances exactly? How much extra cash do you generally have at the end of the month? Do you spend more money than you make? What is your top expense?

Everyone can benefit from some very basic knowledge in accounting. Wait! Don’t run away, I’m talking BASIC basic. Something that everyone can understand and really should understand.

Learning a Financial Statement

To get an overall picture of your finances, you will need to create a financial statement. A financial statement is made up of two accounting reports, a balance sheet and an income statement.

Wikipedia defines a balance sheet as “a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a financial year.”  In english, this is a list of your assets (such as stocks, bonds, and businesses) and liabilities (such as a mortage, student loan debt, and credit card debt) by value.

*These are not actual numbers or liabilities / assets

It is a list of all assets and liabilities as a set point in time, nothing more, nothing less.

Wikipedia defines an income statement as “a financial statement for companies that indicates how net revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”). The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.”

*These are not actual numbers or income / expenses

Separate, these reports do give some information as to your finances, but together, they can tell so much more!

Cash comes from two sources, the portfolio income (stocks) and from earned income (business and job). The income then goes through the expenses (payments on liabilities and other expenses such as food and fuel). The remaining cash (also known as cash flow) is excess cash to do with as you see fit. It can be spent on a night out (extra expenses for that month), buy a new boat (new liability with new monthly expense), save it (added to the bank account or money market account as an asset), or invest in the business or more stock (new assets).

What’s the Deal With Assets?

You’ll notice I didn’t mention a home as an asset. From a strict account perspective, a home is an asset in the form of equity. I’ve been a keen fan of Robert Kiyosaki’s Rich Dad Poor Dad books since 2001. His view of assets makes a lot of sense in that he defines an asset as a security that produces income. Based off that definition, a home is a liability in that it doesn’t make you money, it costs money in the form of taxes, repair costs, mortgages, etc.

The goal is to increase the asset column and decrease the liability column. In what order is really up to you and the opportunities you have. Having cash on hand to take advantage of opportunities is a must; otherwise, by decreasing that liability column, you are also lowering your monthly expenses, or working to lower them. The less expenses you have, the more cash flow, the more assets you can buy or liabilities you can eliminate.

If you enjoyed this post, make sure you subscribe to my RSS feed!

Related Posts