Episode 25: The Wealth On Any Income Book – Section 3: The Balance Sheet – Transcript
Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.
In the previous episodes I spoke about your five year financial goal; how to work with other people to achieve your goals and the difference between good debt and bad debt, and how good debt can support you to create wealth.
Today, I will continue reading the third section of the Wealth On Any Income book. This section is where I cover the tool, tips and techniques that will lead to you having Complete Financial Choice® in your life. Today I’ll talk about the Balance Sheet. This form will tell you where you are now financially, what assets you have to invest, and what assets are not working for you. It will let you know how close you are to Complete Financial Choice®.
As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.
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The “Balance Sheet” represents a major step in creating financial freedom: Finding out where you are now. The way I will explain and use this form is designed to assist you in creating Complete Financial Choice®. Some of the terms I use will not fit with generally accepted accounting standards. This is done on purpose to support you by using concepts that work for ordinary people. If you are an accountant, I think you will still recognize my version of a balance sheet.
With this tool, the balance sheet, you’ll look at everything you own and everything you owe. It’s like a snapshot of your overall financial picture and only reflects the moment in time when you fill it in. The next moment, your cash could be higher or lower. This tool will show if you are in a positive or negative financial position. You may see how some items can produce income for you when you chose to stop working for a living, and others won’t. As an example, equity in a car or a home produces no income to buy groceries.
Robert Kiyosaki in his book Rich Dad, Poor Dad says that a home in which you live is not an asset at all, but a liability. Not only does it not create any income, it does create expenses, from the mortgage payments and property taxes to the maintenance, repairs and utilities. His book is designed to move people from what many would consider wealthy to mega wealthy. My purpose is to move people from struggle to wealth.
The value in seeing this snapshot of your balance sheet is the opportunity to create a before and after financial picture. First, I’ll guide you in completing the form and then describe what the picture represents. Whether it’s three months, six months, or one year from now, take this picture again. This is how you’ll measure your progress. You’ll see if you have more cash in the bank, newer cars, more investments, or less debt each time you take a new picture. The objective is to create a large, investable Net Worth. This is the amount you would have left over if you sold everything you owned to pay off everything you owed. Assets are everything you own. Liabilities are everything you owe. If you subtract what you owe from what you own it’s called Net Worth. Even though you won’t be selling everything you own, net worth is the measurement to show you how close you’re getting to Complete Financial Choice®.
At this point if your eyes glazed over, or your ears stopped listening, take a break. Call a friend and tell them what you just heard. This is as close to accounting as I will get in this book. So, if you’re concerned about that, you don’t have to be.
First, if you own a home, estimate how much you would receive if you sold it today. This is called Fair Market Value (FMV). Put the total sale price without reducing it for any loan or mortgage balance you owe. The mortgage balance amount will go under Liabilities. The difference between the amount you owe on the house and how much it would sell for is called ‘equity.’ I’m not asking you to figure this out anywhere. I’m just defining a word I’ll be using shortly.
If you don’t have a house then this will be blank. Don’t put the rent payment you make each month here; that will go on the Cash Flow Form.
The balance of the questions under Assets should be straight forward. You either have money in an Individual Retirement Account (IRA) or you don’t. This would be the same for a company retirement plan like a profit-sharing or 401(k) plan. Securities are stocks, bonds and mutual fund investments.
For life insurance cash value, this is what you would get back if you canceled the policy. This only applies to policies that build cash values such as whole life, universal life, or variable life. If it is term insurance, the cash value would be zero. Do not put how much would be paid if someone died. That would be the face amount and doesn’t apply here.
If you don’t know what something is, like stock options, chances are you don’t have it, so don’t concern yourself with it. If you’re self-employed or have a business that can be sold, list the amount you would receive after paying off business debts, if it can be sold. It may have a value beyond your business equipment or inventory, or it may not. After you’ve listed everything you own under Assets, list what you owe under Liabilities. You’d have already listed the total of your credit card debt from Tool #1 which you’d find in the Appendix if you have a paper version of the book, so put the total where this is requested. Be sure you’ve included car or boat loans and debts to friends or relatives. Include back taxes and student loans, too. Write down the total amount due, not the monthly payment amounts. Again, monthly payments go on the Cash Flow Form.
If you lease a car, it’s possible the amount you owe is greater than its value if you wanted to get out of the lease. If that’s the case, put the additional amount that you would owe in the Liabilities column under Other Debts. These future payment obligations represent a liability to you for the amount above the value of the car. On the Asset side, you would not show any value for the auto, because you don’t own it if you’re leasing it.
Net Worth, as I explained earlier, is the amount you have left over after you subtract your liabilities from your assets. This may be a positive number, and a large one, or it could be a negative number. Don’t blame yourself and get upset if you don’t like the number. It’s just a number, and doesn’t represent who you are as a person. This book and my program are designed to make it a big positive number. This is the number that shows how close you are to Complete Financial Choice®. If you determined a $500,000 net worth would be enough so you could stop working, and your net worth was $312, it just means that you’ve got some work to do.
It also depends on what makes up the net worth. If it’s only based on the equity in your home and you don’t plan to sell your home, you’ll need something else to provide an income. This is where I use the word equity I defined earlier.
Other items outside of the Balance Sheet round out the picture: These are the benefits your company is providing to you if you get sick or disabled, how much life insurance your beneficiaries or family would receive if you died, and if you need to consider some estate planning like a will or living trust.
I created a calculation you can use to determine how close you are to Complete Financial Choice®. If you divide your annual gross income into your net worth and the result is between 12 and 15, you may already have achieved financial freedom. As an example, when I divide my income into my net worth the result is 25. And based on my formula, Warren Buffet is close to 700,000 (686,667 dividing his taxable income into his net worth)
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Here’s your opportunity to grow: Send an email to me and request all the forms I talk about in this, and the next several episodes. Send your request to Rennie@WealthOnAnyIncome.com.
In the next episode we’ll continue in the third section of the book where I cover the Cash Flow form. This form will tell you where your money is coming from and where it is being spent. It’s the tool that tells you how you got to what you have on your Balance Sheet.
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Until next week, be prosperous. Bye, bye for now.
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