The Power of Your Financial Statement

In my hubs, blogs and articles I often talk about the need for financial education and awareness of how money works, and more recently I have been interested in the power of the financial statement. I really think that if more people knew how money worked, fewer would be hesitant about starting their own businesses and/or investing in a sound financial future. Furthermore, and perhaps more importantly, fewer people would be reliant on bankrupt governments and institutions to safeguard their financial future.

A few short years ago I was ignorant, or if you like blissfully unaware of how the world of finance worked, much less how I could trap some of the trillions of dollars in circulation for my own personal benefit. I only understood that I needed to work hard and save my money. However, after reading Robert Kiyosaki’s Rich Dad’s guide to Investing, in which he stipulates that the first step to attaining a life of abundance is to understand how to read and make a financial statement, I felt empowered to make a change.

I set out to study how to read them, and though I still have a lot to learn (we all do), I have gained a full appreciation and understanding of how the rich think, and now I want to help others do the same. As the saying goes, give the poor man a fish and he feeds his family for a day, but teach him how to fish and he feeds his family for a life time. Need I say more?

Just understanding the basic elements of a financial statement and how they relate to each other opens up a whole world of powerful possibilities in the financial student. Understanding which parts of the statement dictate whether you will be poor, middle class or rich causes a fundamental shift in thinking, for most people, and sparks curiosity and change. At least it did for me.

The poor have the problem of making their income match their expenses, while the middle class are eaten up by their liabilities, yet the rich are concerned with buying income generating assets that cover liabilities, and as a by product, their expenses. These simple facts illustrate so strongly the difference in thinking that different people have, yet few people seem to be aware of this.

The middle class are so intent on keeping up appearances and painting a picture of abundance, wealth and prosperity when in fact they are being sucked into a hole of debt. The unfortunate thing is that in this modern, commercial driven society the market goes out of its way to entice people into parting with their hard earned cash through promises of higher status, respect, elevated living standards and even sex appeal. Companies make their fortunes while the middle class build their liabilities column like there is no tomorrow!

The point I want to make, is why spend on the liabilities column when you can spend money on assets instead? Assets will put money in your pocket and enable you to buy in cash rather than on credit.

Why put your money into a 401K, IRA or Mutual fund, diverting cash to an entity that may  ormay not  grow at an exponential rate with compound interest year on year, and is at the mercy of market forces way beyond your control? Why give your money to a disinterested third party (believe me, no one is more interested in your wealth than you are, no matter what anyone says) to look after, when you can buy lifelong income generating assets? Why put your faith in your government to look after your retirement when they can’t even look after themselves? If you knew how to harness the power contained in the balance sheet, rather than working for the income statement you wouldn’t need to put your faith blindly in “experts”.

Wealth does not disappear, it is transferred. It is transferred from one person’s liabilities column into another person’s assets. Therein lies the power of understanding the financial statement; if you look after your assets column it will look after you, but if you look after your liabilities column, it will kill you!

Which is the better alternative?