A number of years ago I picked up a book by Robert Kiyosaki called Rich Dad Poor Dad, which is loosely what this article is based on. I say loosely as this article covers one particular aspect of the book and not the whole. I’ll try and keep this less like a school book report and more like a professional article, but no promises.
The focus here will be on our own personal balance sheet. We associate balance sheets with companies and businesses however, if we were to simplify it and categorise our personal finances into a balance sheet how would it look? More importantly how would yours look?
I should highlight that this way of working through your finances is quite simplistic but it will give you a clear indication of your income and outgoings and where each source is coming from, or going to(!) on a monthly basis. I.e. are you making more than you’re spending?
As we know a balance sheet consists of assets and liabilities; assets tend to generate cash either through income, capital appreciation or both. Liabilities on the other hand are a drain on your cash flow every month like credit cards and mortgages.
I was always told that my home is my biggest asset, yet all it does is incur costs: Maintenance, taxes, gas, electric and water bills, and so on. So, is your home really an asset or a liability? However, if we purchase property on the premise we are going to rent it to tenants we can create an income generating asset. Your car, again, on a balance sheet can be construed as an asset because it is something tangible that you can sell and make cash, however it is a day-to-day liability which requires constant cash outflow.
The message here is to start filling up your asset column with things that generate cash either now or will do in the near future. Mutual funds, Stocks & shares, property and businesses all generate cash even when you are sleeping. Use part of your current income stream from employment to invest in assets, in the medium to long term they will greatly improve your financial prospects.
Ironically your ‘balance’ sheet should have an imbalance skewed towards your asset column; this creates opportunities throughout your working life, such as: Choosing to retire early, reducing your working hours, taking more holidays, getting life’s luxuries or generally taking it easy without having the concern of work. Creating these opportunities for yourself also relieves stress.
Below is a very simple picture representation of what we have highlighted here. You should try doing the sums on your own finances to see how they’re looking, sort of a mini financial health check. Work out what your assets generate on a monthly basis and work out your expenses on a monthly basis. Don’t include your income.
If you haven’t already I’d recommend reading the book to get a good foundation of general financial health and how to improve yours.
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