Last year I posted this video blog on the Renegade Detroit Real Estate Investors’s Blog, and I’ve had some people contact me recently about this very topic. So, I’ve decided to re-post this video here on Drive To Freedom.
In the video you’ll see me explain all about the personal financial statements that you should be keeping track of.
Income & Expense Statement
Your income & expense statement is just as it sounds. It lists all of your sources of income along with all of your expenses. It will tell you whether your saving money each month or if you’re going further into debt. Typically I like to track my income & expense statement on a monthly basis because most income and expense categories fall nicely into this time period. However, you can track things however you like whether it is daily, weekly, monthly quarterly, or yearly.
Your balance sheet is the second financial statement you should be tracking, and I also recommend you track this on a monthly basis. Your balance sheet is simply a listing of all your assets along with all of your liabilities. The “bottom line” of this statement is a calculation of your net worth.
So What’s the Point???
So why should you track all of this stuff? For anyone that has this question the first thing I would ask them is do you know where you are at financially? If you cannot tell where you are spending your money, how can you hope to save money for the future? If you do not know what your net worth is, how can you expect to retire some day. These are very important questions that I think many people do not focus nearly enough time on. Personally I want to retire some day, and I would be much happier if that day was sooner than later…so I study these statements every month, and most times I look at them several times a month.
When I review these statements there are a few key questions I constantly ask myself:
- Where am I spending my money…and I study my expense column.
- How can I reduce my expenses…and I continue to study my expense column.
- How can I make more money…I look at my sources of income and income producing assets.
- How can I increase my net worth…I look at how I can invest in more assets, how I can reduce liabilities.
These are all compelling questions when you ask them and have real data to look at and analyze. Once you have these statements they become very powerful because you can use them to start planning. The answers to the four questions above should result in changes you make in how you live your life every day. Perhaps it means you’re going to reduce your expenses by not getting that cup of Starbucks every morning. Or perhaps it means you’re going to increase your income by focusing the next few months on buying a rental property. It really depends on your mindset and how committed you are to improving your financial picture. If you’re aggressive like we have been you’re going to try to do everything because the more you do the sooner you’ll find yourself financially free…and that’s the point to what we’re doing.
The bottom line is that your personal financial statements are your compass pointing you down your path to financial freedom…without them you are simply lost.
If you would like a copy of the personal financial statement shown in the video you can download it here —> Personal Financial Statement.xls.