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Today's show, build a statement of financial condition, aka a personal balance sheet. Welcome to the Radical Personal Finance podcast for today, Thursday, July 17, 2014. This is the show where we try to give you some steps that you can take to connect those big goals, big dreams, and big visions that you have for your life to where you are today, and give you some practical, actionable tools to help you achieve your goals faster and with greater ease.

So I'm thrilled that you're with us here today for today's show. And when I sat down this morning and was working on my outline for what I wanted to talk about, what I really wanted to talk about today was paying off debt, and the order that one should pay off debt, and kind of continue some of my commentary from the previous, from a show, I think it was earlier this week.

And it's one of those topics that in the financial world, I see a lot of information that's good, but it's just looking at one side of it. So I prepared this long outline of how I would think about paying off debt and how to integrate all the different tools.

And I realized that I can't go there without starting with the first step. I can't go to how to pay off the debt without going through some of the information on, you know, making how to write down what you owe and all the different aspects of the debts. And this could be very simple for some people, or it could be very complicated for other people.

But then I realized, well, I can't start there until we go into financial statements. And so at the risk of going too deep on things and having these shows be too long and too overwhelming, I've decided today to start with an introduction to personal financial statements. And if that makes your eyes glaze over, please stay with me.

I promise I will make this fun, and I'll make this interesting, and I'll make this really actionable. But if you don't have personal financial statements, you're flying blind. The first thing that if I were a financial planner working with you, the very first step that I would do after talking to you about what you're trying to do and what your goals are is I would start making financial statements.

Because the financial statements give us the information that we need to go on. Now, if you'll make these for yourself, and I'll talk you through how to do them in a professional way so that you get all the information that you need. But if you'll make these for yourself, then you will really be on track to be able to guide yourself and coach yourself through whatever the situation is that you see, that you're in.

And what you'll see is that the information that you have written down on paper will help you to be able to make progress. Now, very few people actually keep personal financial statements. But yet I'm convinced it's one of the most valuable things that can be done is simply to do this.

It won't cost you a dime, you don't have to buy a product, a pen and a paper is all you need. And I'll teach you how to do that today with the basics. And I hope to inspire you as to how useful these things are so that you can actually have something to work from.

So that's what we're going to be doing today. I don't have an interview for you. The interview that I had scheduled for today is pushed off to this weekend, so hopefully I'll be bringing that to you next week. And I've reached out, I've got a long list of people I want to interview, and I'm reaching out to them little by little.

Tomorrow's show is going to be a Q&A show. I'm trying to get some technology set up so you'll be able to call in questions. There's some great technology for that, to be able to call in questions right from your cell phone, because I assume that's how many of you are listening to me.

So I'll have that set up as soon as possible, but it won't be ready for tomorrow's show. I've got a couple of questions to answer for tomorrow, but I still have room for a couple more. So if you've got something you'd like me to talk about on tomorrow's Q&A show, let me know.

And then hopefully by next week I will have the technology set up so you can call in a question on a voicemail line. And I think that would be really fun, so I can start to hear your voice and start to be able to do more than just read text.

So let's jump in. All right, in a previous show I said one of the most valuable concepts that I would encourage you to think about is how to run your life like a business. And I don't mean by that. I do not mean that you've got to try to figure out how to maximize the economic potential of every single decision.

A, that's a false concept about business. The goal of business is not necessarily to maximize returns, although that's a very important aspect of it. But that's not what I'm talking about in this sense. What I mean by today, what I mean by that phrase of run your life like a business is gather some objectivity and pretend you're running a business.

It'll help you to be a little bit disassociated with the actual emotion of your life and where you are. It'll help you to make better decisions. Now as humans we have this incredible challenge of being very emotional creatures. We make most of our decisions emotionally and then we justify them logically.

So when we're trying to figure out how to adjust behavior and how to modify our behavior, we need to really understand the emotional triggers that set us off and then put a plan in place to use those emotions in a positive way. So if you study the science of goal setting or success achievement, you'll see that one of the very important areas is not walking away from emotions, but rather learning how to target emotions.

And how to use positive emotions and enhance the emotional appeal of doing the things that are going to lead us towards our goals and then how to increase the emotional pain of doing the things that are going to take us away from our goals. Well we can do exactly the same thing with finance.

So we've got to manage that emotion, but we've also got to be able to think logically. It's challenging for most of us to be able to think logically when we're wrapped up in this emotional world that we live in. So let's assume that you are deeply in debt. I had a client I was working with in the recent past.

And this client was just deeply in debt, was falling behind on their bills, and was really feeling frustrated with what they were going to do. And I was sitting working with them over a period of time. And because I was not emotionally engaged in the situation, I don't have any creditors collecting me, I don't have to deal with the pain and the fear and the stigma, the social construct or the social stigma of being behind on my bills.

It doesn't bother me, it's not mine. So I was able to sit down and help him chart out a plan and write down some numbers, figure out where they're at with their spending, with their income, and chart out a plan. And because I'm not emotionally engaged in the situation, it's very, very simple and straightforward for me to talk through some of the different steps that they could take.

And we sat down over the course of a period of meetings and we created really an amazing plan. I could just see the hope and the joy and the excitement fire off in his eyes and it made a dramatic difference. And I love doing that. But that's easy for me to do because I'm not emotionally involved.

But when I come to my own life, that's another thing. So in my own life, I've got to deal with my fear, I've got to deal with my hang-ups, I've got to deal with my insecurities, I've got to deal with my frustrations, with my tiredness, with my excitement, with my depression, with whatever the situation is.

And so it's much more difficult. So how can we solve it? Well, you could hire somebody. You could hire an outside person. You could use and work with a trusted friend who could be that. Or you could do it for yourself and you can coach yourself through if you can get an objective perspective on where you are.

So an objective perspective with finance is run, or helps. The mental model that I like to use to help gain an objective perspective with finance is to view your life like a business. So let's assume that you're going to come in and you're going to help me with my business or you're going to come in and take over a business.

Assume that you've decided, "I'm going to make up on, you know, I'm running a dry cleaning store." Okay, so now I've got a business. I've got a dry cleaning store. And you've decided that this is a good investment for you. You have some money and you are going to come in and you are going to decide that you're going to take over my dry cleaning store.

And it's struggling a little bit, but you're able to get a good deal on it. So you come in and you're going to take it over. Well, where would you start? Where would you start? Well, if I were going to go and take over a business, what I would do is I would start by figuring what is the purpose of the business.

And I probably jumped the gun a little bit by saying it's a dry cleaning store. But with anything, if I'm running a business, and let me ditch that metaphor of the dry cleaning store because it probably wasn't as good. I'm going to take over a business. The first thing you're going to do is you're going to come in and say, "Why does this business exist?

Why are we here and what are we doing?" If it's business, who are we trying to serve? Who are our customers and what do we have to serve them with? And so this is the same thing in financial planning. I recorded a show in the past, one of those first ten episodes.

I said, "What do you want? What do you want?" That's going to be different for every person. You've got to decide what do you want out of life. And not to sound all guru-ish, but seriously, what do you want out of life? Do you want money or do you want what money can buy you?

Some people think they want money, and what they actually want is what money can buy them. Well, if we can figure out what money can buy you, is it freedom? Is it prestige? Is it admiration? I was reading an article yesterday about Bernie Madoff. I'm fascinated with Bernie Madoff, who was the guy who swindled people out of billions of dollars, ran the massive Ponzi scheme.

And I was reading a little bit about his--this was in Daniel--what's his name? The guy who runs the company called Inkblot. He's a behavioral psychologist and involved a lot in behavioral investment. I was reading his book called You're Not That Great. I think that's what it's called. He was talking about Bernie Madoff in this book.

And in talking about Bernie Madoff, he was recounting some of Bernie's stories, and that Bernie Madoff really seemed like he was looking for prestige. He felt he was looked down upon as just the Jewish guy from Brooklyn, and nobody really had prestige. And so what he really gained by running his fund in the way that he did was he had all the great financiers of Wall Street coming to him to find out what his secrets were, how he could create such amazing returns, basically bowing down to him.

And so it wasn't so much about the billions; it was about the prestige. So with your life, what do you want? Is the money a tool to freedom, or is the money a tool to prestige? And you'll see people take different actions. So on the one hand, you may have someone who is very focused on money as a path to freedom.

And so for them, money is a path to freedom. They're looking at how efficiently can I get there to do what I want to do with my time. And so they may choose to drive a less expensive car. They may choose to be very frugal. They may choose to not spend a lot of money on things that are status symbols, because to them, they just want control over their time.

The best example of this that I would use as the man I'm going to interview next week is going to be Jacob with Early Retirement Extreme. It's clear to me--I've never spoken with him, but just from reading his writing-- it's very clear to me that what he values more than anything else is autonomy, self-direction, and freedom to do what he wants with his life and with his time.

Now on the other hand, you can see a lot of people who are very interested in status, and they are looking for societal symbols, societal status symbols. So this is where people will maybe--you'll see them try to express that in certain outward status symbols. For some people in certain cultures, maybe it's a fancy pair of sneakers, or what are they--I don't know, tennis shoes, whatever they're called.

I've got the latest fancy pair of Air Jordans, and this is my status symbol. In other cultures, it's wearing the latest fashion from Gucci or Armani. For one guy, it's wearing a suit all the time, and for another guy, it's wearing a XXXL T-shirt with baggy shorts falling off his bum.

These are different status symbols, and so people are trying to express themselves with status. People do this with cars. People do this with the individualization of their cars. So in one culture, it may be with having the latest, greatest BMW. In another culture, it may be having the latest, greatest, fastest car.

And then in a third culture, it's having the biggest rims or the fanciest paint job. And then in the fourth culture, maybe the frugality culture, it's having the biggest beater, the biggest junkie car. So everyone's kind of--with some people, they're trying to express status. This may be in the home you live in, the type of job that you have.

Many people are not going to--they're looking at-- they look at their job and their work as a status symbol, so they'll do work that allows them to portray themselves as successful. You know, I had one of the jobs that I had right out of college. I had one of these successful jobs.

I was a corporate marketing consultant, and I could make it sound really fun. Well, I could see people's eyes go off if I described what I did. But if I were to describe myself as a life insurance salesman, a life insurance salesman, this is something that is not the most status--high status symbol.

However, it's a far more lucrative business if you're good at it than the other. So you look at this, and the memory that I have is one of the most underappreciated areas that I remember reading years ago in Tom Stanley's books. He talked about junkyard--people who run junkyards and recycling centers and things like that.

He was talking about the wage in this industry. The standard for an owner of a company can be over a million bucks a year, and that's kind of the standard. But it's also a very low status symbol, or blue-collar work. You could easily have blue-collar workers--a guy who runs his own plumbing truck making six figures a year, but he doesn't have the same social status.

So the first thing is, what do I want with life? What do I want for me? And that's where goal setting comes in and kind of just laying out an ideal picture of the future and a vision of the future. And that probably never changes because it adjusts as time goes on.

And there are certain levels of--if we go through the Maslow's hierarchy of needs, the same thing where there are certain levels of action steps that you have to achieve with finance to be able to even have the ability to think bigger. If you're behind in all of your bills, the creditors are calling constantly, you don't have a great income, then before you can sit back and say, "What would I do with Joshua's $10 million question?" you might have to say, "I want to be current on my bills, and I've got to figure out how to go from $8 an hour to $9 an hour to $11 an hour to $15 an hour to even think of going from $50 an hour to $1,500 an hour." So there's a growth, and that's good.

That's great. That's normal. There's a growth and a progression of everything we do in life. But once we know where we are--where we're going--so back to my business metaphor. What does this business exist to do? Who do we serve? What is our purpose? Our raison d'etre, our reason for being.

Why are we here? What are we doing? Now, once we've solved that, we've got to start with the second step, which is what do we have? So if I were selling you a business, and you were coming in to turn this business around because it was struggling, once you've answered that question, at least in a simple way, what do we serve?

So if this is dry cleaning, we're trying to get people quality dry cleaning and a quick, efficient service. Done. Simple as that. It doesn't have to be about saving the world and solving all of the social problems of the world. Rather, it can be something very simple and straightforward, but you need to know what it is.

It can be big and fancy and brilliant as far as making you feel like it's really going to be a world-changing impact. But then once we know where are we going, what are the goals, then we start with what do we have. What do we got? What assets do we have?

What liabilities do we have? Now, with assets and liabilities, there are various financial assets and financial liabilities, and there are various non-financial assets and non-financial liabilities. And this is very important, because a lot of times with financial planning, we're going to talk about the financial assets and the financial liabilities.

But the truth is, is just like yesterday, I talked through the difference between real assets and financial assets. We have the same thing with real assets and real liabilities and financial assets and financial liabilities. Or, I don't like the word "real" so much, because "real" implies what I'm talking about, real assets with real estate, capital buildings, machinery, equipment, that type of thing.

So I'm going to use non-financial assets and non-financial liabilities that can be exercised to turn into financial assets and financial liabilities. So, in a business, a non-financial asset would be something like, and again, accountants, don't get mad at me, because some of these cross the boundary. So I would use, in a business, something like intellectual property, I would call that a non-financial asset for the purpose of this conversation, but that would actually be valued on a business balance sheet, depending on what type of accounting that we're using.

For today, let's keep it simple. So, we're going to have a non-financial asset, like our employees. We're going to have a non-financial asset, like a real asset, like our building, our equipment, our plant, our dry cleaner, our dry cleaning machines, our racks. We're going to have our customers, our customer base, our goodwill, the reputation that we have in the marketplace.

That would be for a business. Now, in our own life, isn't it the same thing? We all have a certain reputation. We all have certain skills, certain knowledge, certain abilities, certain experience that gives us our ability to go out and transform those non-financial assets into financial assets. So, in goal setting, one of the things that we would want to talk about is we want to make a list of all of our non-financial assets.

What can I do better than anything else? So, for example, for me, I have a tremendous skill and knowledge of technical financial planning. That doesn't turn into money unless I have a customer, but that is an asset that I have. I've got a bunch of crazy letters after my name that really all they say is I'm good at taking tests and memorizing information.

So, this is a certain knowledge base that supposedly is supposed to mean something to some people. Now, I can take that and I can leverage that in the financial community and I can leverage that into getting an interview at just about any financial firm that I wanted to get an interview at because I've developed that knowledge and skill and ability.

I hope this doesn't sound arrogant. It's not meant to sound arrogant. It's just meant to sound real. When I was first starting as a financial planner six years ago, then, yes, I could get interviews with people at different firms, but it was very different than today where I get about a recruiting call a week or in the past have.

I get a LinkedIn message from a recruiter saying, "Hey, look at my interest." I get emails. I get phone calls. It's very flattering. It could lead to great financial gain. For example, it's nice to have a backup plan where knowing that I could always go out if I want one.

I could always go out and get a six-figure job working in the industry that I know pretty well. That's a really nice, comforting feeling to have. Who knows? Maybe I'll need to do that in the future. But that comes from an asset and knowledge base that I have. Well, it's the same for you.

So what are your assets and what are your non-financial assets? What are your non-financial skills, your abilities, the things that you can leverage? If you have the ability to cook, well, this is something that you can leverage. If you have the ability to not just cook, but you have the ability to create a masterful menu, a masterful cuisine, this is what makes the difference between being a line cook at Denny's and being an executive chef or whatever the word is in that chef industry at the most acclaimed, admired restaurant in town.

These non-financial assets really build our ability to earn financial assets. And we've got to develop the human capital to be able to build the financial capital. So I don't want to spend too much time on this today, but if you were to read any good career book or any coaching book, it would start by saying, what are your abilities?

What is it that you do well? What are your assets? What are your strengths? And so whether this would be a psychological profile like StrengthsFinders or whether this would be a, what's it called, the four different, the INTG or these psychological profiles that can be helpful to say, here's what I like to do, here's what I enjoy.

Those would be ways of trying to figure out what your assets are and what your liabilities are. If you're a detailed person or not a detailed person, there is room for both of them. But if you're not a detailed person, I would suggest don't take a job as a staff accountant at a firm.

Because to be a staff accountant, you need to be able to be a detailed person and enjoy working through the details. So understand what your assets are and what your liabilities are. That's for another show, but hopefully that's a bit of an introduction. So let's go to the financial assets.

Well, with financial assets, this would be trying to figure out what is the money that we have and where is it going and where is it coming from. And so in business, if we were in business, there are four basic financial statements that run all businesses. And I promise we won't get too heavy into the financial accounting here.

But in business, there are four basic financial statements. And so if you hired me to turn your business around or if I hired you to turn my, let's go the other way. You hired me to turn your business around. The very first thing I would do is we would have a conversation about what's our purpose, what's our mission, what's our vision, what are we trying to do, do we have any chance of doing it, and then we're going to go look at the numbers.

And in business, here are the four financial statements that we're going to review. And just a very quick overview. Don't tune me out on this because if you want to have any skill of being an investor, so for example, any skill of analyzing companies, analyzing business opportunities, to any degree that goes beyond just, okay, I'm going to buy an index fund, which there's nothing wrong with that, but if you want to have any skill, you need to understand these statements and how these work together.

So the first would be a balance sheet. This is called a statement of financial position. I don't care which one name you use. It doesn't matter. But a balance sheet simply tells you what your current financial position is. It tells you all of the economic resources that you have and all of the sources of financing that you have, and it tells you where you are at a specific point in time.

And so in business accounting, this would be the basic accounting formula that you would learn in financial accounting 101 in college is your assets equals your liabilities plus your stockholder's equity or your shareholder's equity. So assets equal liabilities plus shareholder's equity. And this is the basic accounting equation that everything is built around.

And so here you would see a listing. If you looked at a business balance sheet, you would see a listing of all of the cash, all of the accounts receivable, all of the current value of the real assets, such as plants and equipment, all of the money that's owed, any notes payable, any liabilities that are outstanding, and then the shareholder's equity in the beginning would be the contributed capital, so how much money was invested into the business at the beginning.

Now we can simplify this over to the world of personal finance, and we can create a personal statement of financial position, a personal balance sheet, and this one can be a little bit simpler. We can dispense with the stockholder's equity, and we call that net worth. So then we have assets and liabilities.

And so today we're going to talk about how to calculate this and how to create one for yourself, because this will be the first informational statement that you need. Now briefly before we get into the details of that, I want to cover the other three financial statements that work in business.

And not all of these are going to be necessary for your personal financial accounting, but I want you to see how valuable these are. So the second of the financial statements that you would prepare in business, or if I were turning your business around and I would ask for or you would have prepared for me, would be an income statement.

So an income statement would be called also a statement of income, a statement of earnings, or a statement of operations. So depending on what nature of accounting--are we doing GAAP accounting, are we doing non-GAAP accounting, are we doing the international standards-- depending on who your accountant is, it's called everything.

So I'm just going to call it an income statement. And an income statement reports the primary measure of economic performance during a period. It talks about what's our income and what are our expenses. So an income statement would list all revenues from sales in your business and would subtract out the cost of goods sold, any expenses incurred for selling the goods, and any interest expenses.

And this would equal our net income. So in business we have an income statement. And this would be an important statement that we're going to review because revenue is listed on this income statement and our net income. Revenue minus expenses equals our net income. Then the third statement would be the statement of retained earnings.

And so the statement of retained earnings reports the way that the net income and the distribution of dividends to the shareholders have affected the financial position of the company during the accounting period. So the balance sheet was a specific point in time. These other income statements are during a period of time.

So over a year, over a month, over a quarter, over a decade--depends. Usually they'll be quarterly or annually. But this would be the statement of retained earnings. And basically what it says is we would say, okay, how much retained earnings did we have at the beginning? How much income--net income was added to it?

How much did we pay out in dividends to our shareholders? And what's our ending retained earnings? What is the amount of money that we have at the end of the accounting period? So this would be the statement of retained earnings in a financial accounting. And the fourth one would be the statement of cash flows.

And so the statement of cash flows reports any inflows of cash-- so receipts for sales-- and any outflows of cash or payments during the accounting period across all the categories of operations, investing, and financing. So whether that means we had an inflow of cash from a loan that we've taken out or an inflow of cash from an investment activity or an inflow of cash from the sale of--from the income statement, this would be where we--and we'd track those cash inflows and outflows.

And so this--we would capture the cash that we collect from customers, the cash that we pay to suppliers, the cash that we pay to purchase equipment, and the cash that we borrow from banks. These are the four basic statements. And in accounting, you'll quickly learn--you'll learn how these function together.

And what there is is that there is a basic flow between them, and there's a working between all of these numbers. So on the income statement, we would have the retained-- the revenues minus the expenses equals our net income. That net income would flow over onto the statement of retained earnings where we would have the beginning retained earnings plus the net income minus the dividend, and that would equal the ending retained earnings.

The statement of cash flows would take all the cash flows in, all the cash flows out. That would flow over onto the balance sheet as far as the cash on the current balance sheet. The cash plus the assets minus the liabilities, and then the contributed capital would wind up being our retained earnings.

Okay? Done. That was three minutes of heavy accounting, which you've never-- that was financial accounting 101, but this was an important statement. So how can we simplify this for personal financial? Well, in personal financial planning, we're basically going to work with two financial statements. The first financial statement would be a statement of financial position, a balance sheet, and the second financial statement would be a statement of cash flows.

These are the primary statements that we're going to work with. We don't need necessarily all the rest of it. We can--although we could create them, but they're kind of unnecessarily complicated, especially for an audio podcast. But if you understand how the back and forth between the business and the personal life, it makes it valuable and helpful to know how to work these statements.

So one of the biggest things that I want to talk about is that if you'll start preparing these statements for yourself and tracking them, you will be a better investor and a better business owner. And I believe it's very powerful that all of us should be viewing ourselves as in our own business.

All of us are in our own business. Now, whether that means that we have one client, i.e., the employer that we have right now, or whether that means we have 30 clients because we run an independent consulting practice, doesn't matter. We're all in business for ourselves. And so a basic understanding of the language of business will go miles towards helping you to run your personal finances in a better way.

And the very first language of business is with numbers. Now, I don't think necessarily that we all have to be nerds. And so people would say, "Well, Josh, would I really have to do this? I'm not the accounting type. I'm not the right-brain, logical, you know, pencil-licking accounting type." Well, I've got three answers to that.

Number one, don't be ridiculous. It's your money. It's your life. Why do you not care about it? No matter how artsy you are and no matter how big-picture thinking you are and no matter how creative and "I'm not the numbers type," this stuff matters. Because if you want to have the ability to stay at home and paint every day, you've got to understand at least the basics to be able to say, "How am I going to fund my life to be able to paint every day?" It's not that tough.

So number one, don't be ridiculous. Number two, it's okay. You could probably automate some of this, but you need to understand it. You can automate some of this so it happens pretty easily, but you need to understand it. If you are just simply saying, "I'm going to ignore it," then you're going to get bad results.

There's no person that's running a company that ever gets good results that doesn't pay attention to the numbers. One of the most important things you have to do is pay attention to the numbers. And if you're listening to a show like this, I assume you care, but you don't have to be a nerd about it.

You don't have to be me. When I get excited, I make a spreadsheet. My wife and I joke. I often tell her, "I got excited about this, so I went and made a spreadsheet." I mean, it's motivating. If I figure out, "Here's how I could save $38 on my car insurance without giving up any of the benefits that are exciting to me," and look, if we project that $38 forward over the next 48 years, this results in another million dollars of net worth if I invest it, blah, blah, blah, blah, blah.

I get excited by that, but you don't have to be me. It's okay. So you can automate it, or you can hire it. So you can hire someone to do this for you. You can have an accountant prepare this for you. You can have a bookkeeper to prepare this for you.

You can hire a financial advisor, a financial planner to work with this. But you've got to understand it. You can't sit back and say, "Well, I'm going to let someone else run my stuff for me." You've got to understand it. No matter how much you trust, you still need to understand what's going on.

And so, yes, I don't expect people to-- I wouldn't expect people who are financially advanced to sit there and say, "I'm going to prepare all these statements for myself." The CEO of, insert big company here, does not prepare his own financial statements. He has a chief financial officer, and the chief financial officer does not prepare his own financial statements.

The chief financial officer has a team of accountants, and those team of accountants has a team of assistants, depending on the size of the company. But the accountants prepare the statements. The CFO goes over it with the accountant. The CFO then presents it to the CEO. They talk about the meaning and the impact of it.

But if you're running a company, and you don't understand where you're at financially, you are doomed. You're doomed. Same thing with personal financial planning. Show me somebody who understands numbers and the basics of how these things work, and I'll show you somebody that over a period of time will wind up very, very wealthy.

Show me someone who doesn't understand the basics of these numbers and how these things work, and I'll show you somebody that's swindled repeatedly and that never has any money because they can't plan. Now, this is not complicated. It's fairly simple, but you do have to learn a little bit.

But if you take your most important goal and figure out what your most important goal is and figure out how money plays into it, I guarantee money plays into it in some way. So this is worth learning. All right, rant over. Gonna move on. So today we're gonna talk about how to prepare a statement of financial position.

Hopefully I've sold you on the value and the importance of it. Hopefully I didn't lose you in going into the depth of financial accounting. But I wanted to show you how there is a parallel between business finance and personal finance, and you would never invest in a company that could-- put it this way.

I would never invest in a company that couldn't show me accurate financial statements because those accurate financial statements will show you everything that's going on in the company. And if you can read a financial statement, you can know everything there is to know about a company if you know how to read a financial statement.

I love studying this. I'm not great at it. I'm learning to be better at it, but to me, I enjoy this immensely. And this skill is a tremendously valuable skill 'cause it affects every area of life. So hopefully I've sold you on the concept of preparing some financial statements.

So let's talk into how do you do this. So today we're gonna cover how do you prepare a statement of financial condition, and then I'm just gonna talk about what is some of the information that you can use from it, and then we're done for today. Another day we'll talk about how to prepare a statement of cash flows, and that will lead me ultimately where I wanted to go today, which was into kind of understanding-- and this is a made-up word that I made up.

You don't see this in literature-- a statement of liabilities, which would basically be a schedule of all the debts and all of their terms and all the interest rates so you can figure out what order and how to go about paying off debt. But, you know, is it good to say to someone, "Pay off your debt and use a debt snowball"?

Sure, that can be fine to a point, but let's go a little bit deeper and let's understand what's behind that. And instead of just simply giving people this idea that gets them motivated for 12 months, and then they're done, and then they go into debt again 12 months later, let's talk about how to be a little bit more sophisticated and understand how all of these things work together.

So how do you make a statement of financial condition? Reference in the show notes the template statement of financial condition that I have put in the show notes. And I built this as a Google spreadsheet. It's very simple. You can do this with a spreadsheet, and you can do this with a pen and a piece of paper.

And if your financial life is fairly simple and straightforward, you can make this simple and straightforward. If your financial life is complicated and intricate, this will be very complicated and intricate. It doesn't matter to me, but this would be the very first step if I were coaching somebody, whether they owned 18 businesses or whether they owned no business and earned a $40,000 straight salary, we're still going to make exactly the same document.

So we start with the assets. Now, in this world, I'm purely talking now about financial assets. I'm talking about the financial assets, things that we could sell and get money out of them. And so in our financial assets, we're going to have three categories into which we're going to categorize all of our assets.

Number one would be cash or cash equivalents. Number two would be investments. And number three would be use assets. So cash, cash equivalents, investments, and use assets. So let's walk through these categories, and I'll give you examples of these. In the spreadsheet that I've prepared for you to use, you'll see that there's not-- you're not going to-- no one's going to have all of these asset names.

I've put in the general categories to remind you about them. But what I would do, if I were filling this in, is I would fill in each individual account, the name of it, and the location of it, and then the type of account it is, so that I could have a complete list.

It's not a big deal if you've got 38 accounts. It's not a big deal to have 38 accounts listed on a statement, 'cause you're just mainly looking at how much cash, how many investments, and how much use assets do I have, and then what's the amount of my liabilities.

So list them out in the way that-- with the names that make sense to you. But I've put in a number of different varieties of categories for you to use as your--to help you. So number one would be cash or cash equivalents. So cash in the financial accounting world is basically considered to be things that-- things that can be turned into cash in a very short period of time that's very liquid.

And so the first example of this would be cash, meaning--I mean physical Federal Reserve notes, physical green dollar bills, physical cash. And I think it's a really great idea to always have some amount of physical cash on hand. You would be surprised what you could do if you'll always keep physical cash on hand.

Now, there may be various reasons for this. So you may pull over on the side of the road, see somebody selling something, and say, "Listen, you know, "somebody's selling a car or a boat, "and just the fact that you've got some money in your pocket "and can offer them cash on the spot "and can make a dramatic difference "in their willingness to sell the asset to you quickly." So consider it for that.

Consider it for emergency preparedness. So I always like to keep some cash handy in case of a hurricane. I live in Florida. We may have a hurricane come in. The, you know, the power may be out for a couple of weeks. And so if I need to hire somebody to come in and cut down the trees that are on my property 'cause my chainsaw's not working, you know, some $20 bills and, I don't know, maybe something to barter with, a case of beer or something like that.

So some, you know, this can have some tremendous ability. I bet you after a hurricane, if you had a cooler full of ice and cold beer, that probably gets you farther than a $20 bill. But the $20 bills will get some things done. This happened on my property some months ago.

There was a guy down the street cutting some trees down and grinding some stumps, and I had some stumps in my backyard, and I needed to ground out. I had planned to call somebody and have them come by, but if you call a guy who runs a stump-grinding business, he's got to charge you a fee to get out there.

He's got to cover his gas to get out there and his crew. I got a nice discounted rate by just saying, "Hey, you've got your machine here. Could you swing by and grind my stumps?" 15 minutes later, my stumps were ground, and I got a substantial discount, put some cash in his pocket, because he didn't need to send his crew out special just for my job.

So we would list out any cash, and so whether that's cash that you keep at home, cash that you keep in a safe deposit box of some kind, whatever the situation is, there's going to be some cash that you're going to list out. Number two would be checking accounts.

So do you have any checking accounts? And this would be across the board, list your checking accounts. Number three, savings accounts. So list any savings accounts that you have. Number four would be money market deposit accounts held at a bank. So there are two types of money markets. Number four is money market deposit accounts held at a bank.

Number five would be money market mutual funds held at an investment company. So list out any money markets. If you have a portfolio of CDs that are close to maturity, I would list those out. So if you had a five-year CD, is that equivalent to cash? I wouldn't call that.

I would put that one into the investment category. But if you had a CD that was coming due next month, I would list that in cash. Or if you had any kind of laddered CDs, I would list that in the cash situation as well. So that would be all of your cash or your cash equivalent.

So make a note of that. In those, one additional aspect, you wouldn't generally prepare this as a -- you wouldn't generally put this on a formal financial statement. But I would consider adding any interest rates that you're receiving on these. And this would be kind of one for later.

But if you have cash held in one bank account, let's say you have bank account A, and it's paying you 0.03% interest rate in today's world. And you have maybe an online account, so online bank account B at 2% interest rate, write down those interest rates. So that will help you later as you're coaching yourself and trying to figure out where is my money actually held.

Then that would help you to understand -- that would help you to understand maybe where you should put more of the money. And you might want to move more of the money into the higher-yielding account. So that's cash and cash equivalents. List those out individually. Number two, and reference the spreadsheet in today's show notes, which today's show notes are found at radicalpersonalfinance.com/22.

radicalpersonalfinance.com/22. Next would be investments. So here you're going to list out any investments that you have. So this may be stocks. This may be bonds. This may be mutual funds. Maybe variable annuities or fixed annuities. Maybe some kind of pension account. So a pension account would be a 401(k) that you have at work or a 403(b) or a 457.

It's technically not a pension account, but a 457 is a deferred comp plan, if you have one of those. If you have some kind of defined benefit pension, so maybe your employer offers you what we traditionally use as a pension, which is called a defined benefit pension, where they promise you a certain amount when you leave, try to get some kind of present value calculation on that and list that in there as a pension account.

If you have investments held in any kind of IRA or Roth IRA, if you have any life insurance cash values, I would list them here. If you have real estate that you own for investment purposes, so a real estate portfolio of rental properties of some kind or land or whatever the nature is of your real estate, I would list that here.

And I would list any collectibles that you own for investment purposes. So maybe you invest in art or maybe you invest in coins or maybe you invest in antique automobiles. I would list those collectibles that are owned for investment purposes here. I would list any kind of maybe college savings accounts that you may have, any trust accounts over which you have some control or over which you're the beneficiary.

Be careful listing a trust account. If you're the beneficiary of a trust account, be careful if there's some kind of major restriction, but it would be important to know if you're the beneficiary of a trust account and any business interests that you have. So I would list out any value of any business interests.

Now, and anything else. Anything else that you own for investment purposes, list that out on this section of your statement of financial condition. Now, what do you value it as? Well, remember, a balance sheet is always a snapshot in time. So up at the top of the balance sheet, then you would list out--you would put the date.

So today is July 17th. So if I were preparing this, I would put July 17, 2014. And we're gonna try to get the current value. This is easy with things like publicly traded stocks, mutual funds, pension account balances, things like that if they're a defined contribution plan like a 401(k) or a 403(b).

This is easy because these things are marked to the market every day, and so we know exactly what the current value is. We know what the current market price is. I shouldn't say value. I should say market price. We know what the current market price is. We know what somebody's willing to buy them from me today at a current price.

So those are easy. But what about things that are harder to value? Well, we might have something like real estate. We may have real estate portfolio that changes, and we wouldn't--you can't actually know the value of the real estate until the deal is done. Until the deal is sold, you don't know the value.

Well, just do your best estimate. So if I were listing here real estate owned for investment purposes, this money here, I would keep a whole--if I were running a real estate portfolio, I'd keep a whole separate set of financial statements for my portfolio, and I would just list my current best guess.

If I had any appraisals or things like that, do the best you can. This is--with things like collectibles, you're gonna have to do the same thing. Try to give yourself an honest assessment. There's no need to be excessively kind and inflate the balances, and there's no need to be excessively cruel and diminish the balances.

Try to give yourself accurate data to work from. Now, if you have something like a defined benefit pension, you may not be able to get a-- you may not be able to get a current statement on this. Or another example would be if you were the recipient of a series of income payments.

So maybe you had some kind of structured settlement, a legal settlement, or a lottery payment, or something like that. Traditionally, how we would--how we would value this would be based upon a concept that's called net present value. And so we would try to figure out what would be the total cash flow that would be coming out of this pension in the future, and the total cash flow of-- or out of the structured settlement, and we would back that up to today, discount it down to today, and try to figure out what the present value of this account is.

Most of you are not gonna have to get that complicated, and if you do, you probably have some sense of it. Sometimes you'll have--if you have a pension, sometimes you'll have a lump sum amount. So this would be the amount that if I left today and I just took a lump sum, this would be the amount I would receive as compared to the value of my income payments.

So if you have that, that may be the number that you want to put in. I would put some notes on here, however, if you were valuing something in a way that-- if you were going to value something in a way that were--was a little bit unique, put some notes so that you would know.

On a formal financial statement, there will always be-- on a formal business financial statement, there will always be explanatory notes indicating how the valuation was reached and what goes into it. Are we using GAAP accounting, are we using non-GAAP accounting? What are we--what are we actually-- what are we actually using here?

And so put the same thing on your own personal financial statements. Business interests-- the valuation of business interests is generally pretty tough, and so maybe you've had some kind of formal valuation. The difficulty with business interests is that there are essentially three major ways of valuing businesses, and there are more, but this is just the way that I think about it in my head, and I'll give you those real quick, although I don't want to get in the weeds with business interests.

The way to value business interests-- usually you're going to have three numbers. Your first number would be your liquidation value, so if you just simply said, "Hey, I'm going to liquidate this business. "I'm done with it. "I don't want to run it anymore." What value could I get for selling all of the assets of the company and paying off all the liabilities?

That would be the book value of the business, and so the book value is usually going to be the lowest, 'cause most businesses are not really functioning based upon-- most businesses are not really functioning based upon, you know, the book value. They're using real assets to make money, and so their financial value is much higher than their real value, which is the book value.

Kind of an interplay between those two. Number two would be some sort of capitalization of income, and so this is the more normal account, so various industries will say, "What's the net income "or what's the net profit of the company?" And then we'll use some kind of what's called a cap rate, so over a certain period of years, so in some industries, it may be, "Well, we'll use 5X net income," and so you say, "My business has a net income of $100,000.

"We're gonna value it at $500,000." There's some more intricate formulas that are usually a little bit more useful, and so that's gonna be a second one. The third thing would just be an owner's estimate of value, and so basically, this might be, "How much would I pay you to-- "How much would I pay you-- "How much would you be willing to accept "to walk away from the business?" Those are the three big areas.

Now, there are many, many, many more ways to get more in-depth with it, and those other ways are very important to be able to get in-depth and look at a formal review of your business, but that would just be a quick overview, so do the best that you can to put a business interest.

If you've had a formal appraisal, list that out. If you're just kind of going with your gut, list that out. Now, be careful that you're not overly optimistic here, so if I'm preparing financial statements for somebody-- and I'll go ahead and put their business interest-- but it may be that if we're looking-- we're going to use this later and apply this and try to prepare a retirement plan, I want to make sure that if the person is telling me my business is currently valued at $100,000, it's going to grow at a 10% annual rate, and then I'm going to sell it for $500,000, and that's going to be-- you know, fund my retirement, I want to make sure that that is accurate and that that is possible.

Now, a lot of businesses will lend themselves much more to this than others. So if you started a local landscaping company, then basically the only value that you have is the value of your accounts and your equipment. And so can you sell those accounts to someone else? I bet you can, but I bet you it's not nearly as much as you might think.

I've never worked in that. I had a couple of clients in that business, but you could probably sell your accounts to another landscaper, but it might not be so valuable. Now, on the other hand, if you have some really valuable intellectual property and you've built up a business that doesn't depend on your own involvement in it, you've built a business that essentially just simply prints money for you with minimal involvement for you, that would be a very different value.

So one of the things when we're looking at how to optimize our investment returns, we want to give a high degree of focus to how do we enhance the value of our business from a sales perspective. And this is usually one of the areas that entrepreneurs can really make a big difference.

By systematizing their business, making sure that they're not dependent on any one specific employee, maybe making sure that they've got systems in place and it's well documented, making sure that they're enhancing the book value in every way they can, making sure that they're enhancing the valuations. So at some point I'll try to get an accountant online for an interview who specializes in business valuation, and we'll talk about some of the strategies that you can put in place to-- the strategies that you can put in place to enhance the value of your company.

So you would list out the value of your investments. Third category, use assets. So use assets would be anything that you use. This is stuff that you own that's for your personal enjoyment, for your personal use. Obvious one, do you own a house? That's a use asset. So your house is not an investment, your house is a use asset.

Your house is not an investment, your house is a use asset. Now, you may be able to transform that use asset into a better investment in some way and enhance that, but I'll say it again, your house is not an investment. I'm going to hammer this point for a moment.

The reason I say your house is not an investment, even though it may be one of your highest dollar value assets, is because investments should make you money, and your house doesn't. It sucks money out of your budget. And if you say, "Well, my house is going to go up in value," yeah, but you're right.

But you know what would help it do even better? Is if it printed money for you while it was going up in value. If you rented it out. Now, it doesn't mean you shouldn't buy a house, but just don't think of your house as an investment. Think of your house as a use asset.

This is something that is a lifestyle expense that you are choosing to enjoy. There is nothing wrong with that. It's your money. You can't take it with you when you go. You might as well spend it on what's important to you. So if you want to have a big fancy house, awesome, go for it.

If you want to have a small inexpensive house, awesome, go for it. Your house is a use asset. Look for a way to enhance the value of it. So while you're there, is there some way--can you buy smart? Can you choose a good location with an above-average chance of appreciation?

Do you know the neighborhood that is in more of a demand than other neighborhoods in your city so that you're really able to build up the value in the long term? Yes. Can you enhance the value of your house? Yes. But you're never going to get a dollar-for-dollar situation.

Don't look and say, "If I put a swimming pool, it's going to increase the value of my house by this massive investment return." In my observation and limited experience and conversations with others, I would say it's never going to do that. Put in a swimming pool because you want to own a swimming pool and you're willing to pay for it, and then maybe will it sell for a little bit more?

It might, or it might be a liability depending on how it is. So rant finished, but your house is a use asset. Number two would be owning a vacation home, a condo, another type of vacation property. I was thinking about hotel clubs or timeshares, but it seems like I've never owned one, never planned to.

It seems like those are usually more liabilities than anything else. It seems like I never hear about anyone actually being able to get out of one, so I wouldn't list that as an asset. I'd probably list it as a liability. I didn't think about that before the show. Automobiles.

Do you own any automobiles or other personal property? Do you own a ski boat, a fishing boat? Do you own an RV? Do you own a motorcycle? Do you own a go-kart? Do you own a fancy bicycle? Any kind of personal property. List and value out your personal property.

Now, I think it is important to list out personal property, but I would be careful about what I listed here as far as it having any chance of going up in value. So if you had -- the example that comes to mind is if I had a computer. Let's just say I went down and I bought a new Dell laptop.

I might or might not list that as personal property, and you could maintain two sets of personal property. It would be valuable to have a record, a schedule of your personal property for the purpose of insurance reimbursement, if you had renter's insurance or homeowner's insurance. It would be good to have a record of it.

But on this statement, if I were your financial planner, I would say get the computer off of there. Now, on the other hand, if you've got something like a valuable gun collection, a valuable collection of jewels, jewelry, I think people usually overstate the value of it, but there is value there.

But something like a gun collection. I mean, if you were to buy a Colt 1911 purchased in 1950, and a Colt 1911 today, if you adjust that for inflation, that's pretty much going to keep pace with inflation. So I wouldn't put things in here that are going to go down in value, but you might list something that you think is going to go up in value.

And that's kind of a judgment call depending on what you've got. So just be careful with what you list there, and list it out. Hey, if you want to list it there, great. And then if I were creating a forward-looking financial plan, we would just go through and put in the rates of return and the rates of depreciation.

And then any collectibles that you own for personal enjoyment. So maybe you own some sort of collection of, I don't know, classic cars. This would be listed under automobiles. But do you own any other collectibles? Do you own art that's just purely for personal enjoyment, not for investment purposes?

Or any other use assets? List all those things out. And at the end of that, you will find your total assets. And if you list out that, you'll have your total assets. And so that tells you how much total assets do you have in financial assets. Liabilities. Let me book you through liabilities.

Liabilities, do you have any credit card balances, any auto loans, personal loans, student loans, mortgage loans, business loans, things like that. As far as how to account for the value of a business versus the business loan, me personally, I would keep a separate set of business financial statements. And so I would declare the assets of the business minus the loans of the business, the debts of the business, and then that would equal the business interest that I would bring over onto my personal balance statement.

However, you might make a note with an asterisk, if you're personally on the hook for those business loans, and if those are recourse loans, which is more common in today's world with small businesses in this country, if those are recourse loans, meaning the business -- the lender can come after you if your business defaults on the business, they can come after you personally.

It would be good to have a note of those here, and then figure out where to account for those, whether on the business statements or on the personal statements. And depending on the situation, we would account for it separately. If you'll do those liabilities -- and you'll see how I've laid this out in the spreadsheet -- you'll have your assets minus your liabilities equals your net worth, and so there's a net worth column there.

And then at the bottom, just for a little accounting convention, we total your liabilities and your net worth. So to complete the accounting statement, liabilities and net worth, and then that should equal total assets. If you would like to use my spreadsheet that I've illustrated, remember to put your assets on using a positive dollar figure and your liabilities on putting a negative dollar figure, and that will make the formulas work.

If you don't want to do that or if you forget to do that, adjust the formulas, but if you're just going to use my formulas, then use a positive and a negative. And so down at the bottom of your statement, just like over on the business side, you have your assets -- in the business financial statements, you have assets equals liabilities plus your stockholder's equity.

Here on your personal statements, you have your assets equals your liabilities plus your net worth, and so this would be the personal way to adapt the business accounting convention over to your personal statements. So if you will create this, and you just -- what's the point of creating this?

If you'll create this, number one, you'll have information, and usually this will help you a lot. Many times when people are in financial distress, they're often ignoring the situation. They're often just sitting -- they're trying to ignore what people are -- ignore what they are, ignore the bills. That doesn't help you.

Now, I understand it. It's easy to want to crawl into bed, pull the covers over your head, and just give up, but that doesn't help you because whether you ignore it or not, it's still there. So you might as well address it, and if you need to wait a day or two and, I don't know, do this with a glass of wine and a cigar so you're a little bit relaxed and then make these things up, that's fine, but face the situation, face the facts, because it's always feels better to face the facts, especially if you're in a crisis situation.

Face the facts because then you have a hope of solving them. If you don't face the facts, you have no hope of solving them. So if you look at this, you can gain a lot of valuable information from it. One note that I like to do, and this would be more when I move over to financial planning, with my personal financial statements, I would like to put an estimated return value.

Now, this is not something that I would count on, but I would put an estimated return value. So I would add another column or a note to this and say, "Okay, cash. What's the estimated return of my cash?" Well, traditionally, it should be 4% or 5% if we were in kind of the more mainstream, normal environments that seem to have been that over the past, over history, the regression to the mean of what you would earn on cash would be 3% to 5%.

That would be a more normal situation. And today, and who knows if this is a new normal or this is just an anomaly, I don't know, but today it would seem you output half a percent. I mean, you show me an account that's paying any amount of money that's worth having in it, and it makes a dramatic difference.

There's not much. If I were valuing a stock portfolio or bonds, if you have individual bond investments, then go ahead and value. If those are individual bonds that you own that you're planning to hold to maturity, go ahead and put their yield in there, what you're expecting their yield to be.

If you have a bond mutual fund, you'll have to estimate that yield because a bond mutual fund would have an unlimited duration, and so you would have to figure that out and kind of adjust how sensitive this is to interest rates. If you had mutual funds, estimate something. Maybe you could go and look at the lifetime return of the fund and estimate that.

Maybe same thing with if you had variable annuities. Fixed annuity, put in there the interest rate that you were being paid on your fixed annuity. Look at the investments. Look at your life insurance cash values and try to estimate what a historical return would be on a policy that's structured similar to yours with the company that you have.

Look at any real estate that you own. Try to figure out what your estimated return would be and be conservative, but try to figure that out. And then your business, same thing. Value any use assets that you have. For example, the automobiles, I always would depreciate those at about 15% per year unless there's some other extenuating factor that you know of that would lead to a smaller depreciation rate.

I would write minus 15% in automobiles. Or if I own personal property that was furniture that wasn't high-dollar furniture or furniture that had any chance of appreciating or keeping pace with inflation, then I would put a negative number next to that. Now when you sit back and you look at that and you look at your numbers, you get a pretty clear idea of where your priorities are.

So if you are poor or broke or have always been poor or broke, then probably if you create this document, you'll probably see that any money that you have is likely over in the use assets or it's likely over in the liabilities. Now you say, "Well, duh, Joshua. I know that.

I get that. I'm poor or I'm broke." And what the difference is, I don't know. I've heard people talk about it. I've heard people say, "I'm broke." It's less of a value judgment and more of just simply a fact. I have been broke many times. And who knows? I hope I won't be again in the future.

I keep trying to avoid it, but I've done some dumb stuff and been broke at different times. Nothing wrong with it. Most people have. I read a statistic. This is not confirmed, but I'll have to find it. The average millionaire was broke or bankrupt a couple of times before they finally became a millionaire.

I'll have to find that statistic. I don't know where that came from. If you look at this, you'll see where your priorities are. If you're somebody who values a high lifestyle, what you may see, and I see this a lot here in South Florida, and my joke is to go to Miami.

There are some very wealthy people in Miami, but it seems if you go down to Miami, you will see people that have these incredibly expensive cars and they live in a mobile home. You'll look at car worth $85,000, house, rent, or house, mobile home worth $15,000, and that mobile home may keep value or depreciate slowly over time instead of being some sort of real estate that's likely to go up.

So at least keep pace with inflation. Look at the amount of money that you have in use assets versus investments. Wealthy people would generally place the priority on their investments. Over and above use assets or before use assets, they'll prioritize investments. Savings and investments. So you want to see some healthy numbers in the investment column.

You want to see some smaller numbers in the liability column, and you want to see some smaller numbers in the use assets until those investment assets are funding the use assets. That's, to me, my definition of wealth is that your investments will pay for your lifestyle. That's how I think about wealth, whatever that lifestyle is and whatever those investments are.

So the only way you get there is by prioritizing money from your cash flow statement, which will be in another episode, or I'll just say your budget, out of your monthly income and expenses, prioritizing putting money over to those investments. And then what category that we're putting money into is going to determine.

So you may have a very large business interest and a very small stock portfolio. Nothing wrong with that. Or you may have a very large stock portfolio and a very small business interest. And a lot of times what you'll usually have is you'll have an interplay between these things.

The perfect owner of stocks is someone who is transitioning out of a closely held business. So if somebody transitions and they sell their closely held business for $20 million, well, that would be the perfect thing to go ahead and diversify out of that closely held business into other stocks.

That would be a really good situation. So you can just look at the numbers. And then look at the rates of return. And with this, you can coach yourself. Is all of your money sitting in cash? Is that good or bad? Well, it depends. Are you sitting there and it's sitting in cash ready to go over to the used assets?

We're going to start going down. You're going to buy a big fancy car? Probably not a good idea at the beginning stages of wealth accumulation at least. Or are you looking for a good investment? And there's nothing wrong with sitting back and stockpiling cash and just saying, "I'm waiting for a good investment." I don't know what it is yet.

I don't know whether it's a frozen yogurt franchise, a horse farm, a race car company, or a new company that I see on Kickstarter. I don't know, but I'm looking for a good investment. I'm just going to sit back and stockpile cash until then. Or are you saying, "I'm getting ready to spend this." And if you look at--same thing--if you look at your liabilities, and we'll talk about this in another show in detail.

But if you look at your liabilities and you see credit card balances for personal consumption, furniture loan for personal consumption, auto loan for personal consumption, student loan for personal consumption with a career that didn't result in a high degree of financial earning ability, mortgage loans for an overly expensive house that I live in for personal consumption, and you don't see any positive output of the liabilities, now you know why you're broke.

But on the other hand, you may look over there and say--I kind of always go back because it's just a famous example-- with Donald Trump, back when he was a billion dollars in debt, he wasn't a billion dollars in debt to fund a credit card bill. He was a billion dollars in debt because the entire values of his real estate portfolio was destroyed, and he had to figure out, "How do I come out of this?" So a billion dollars of business debt is a very different situation than a billion dollars-- you would never have a billion dollars of credit card debt.

And the reality is, in that situation, if Donald Trump had gone bankrupt-- again, this is the situation that I remember from his book, "The Art of the Deal" I read years ago-- that billion dollars of debt could easily be discharged in bankruptcy, and he'd be left to start over again.

It's not the same as if somebody owes--it's not the same. I would rather be Donald Trump and owe a billion dollars of debt that's secured by real estate that could all be discharged in the personal bankruptcy proceeding than be somebody who had spent $100,000 on a college degree, financed by debt, that the college degree wasn't pursued for the sake of academic knowledge, but rather for the sake of learning ability, and now I'm working as a social worker making $32,000 a year, and I have no hope of ever getting free of that student loan debt because it's not a bankruptable debt.

I'd rather own the billion and have a real estate portfolio and have a business situation that I could go forward with than be in the second position. Now, can the second person renegotiate their entire life and kind of fix the situation? Absolutely they can. They absolutely can. But just think about that, and I'll kind of quit with that.

So once you can see these numbers, these will help you immensely, and you can sit back and you can kind of coach yourself. And what can you learn from it? Where are your priorities? It's not a judgment statement. It's just where are your priorities? Do you have any chance of getting rich?

Do you have any chance of getting rich? Getting rich is not generally something that happens accidentally. It's something that happens purposefully. You have income, you have less expenses than you have income, and you invest the surplus income into assets that grow over time. There is your formula for getting rich.

Now, you can tweak aspects of that and control the speed. If you have higher income than lower income, then it's probably easier to get rich. It doesn't mean you can't get rich on lower income, but it's probably easier on higher income versus lower income. So you can press those variables, and you can raise your income, or you can choose to have a lower income for other reasons.

Expenses. If you have lower expenses than higher expenses, it's going to be easier to get rich. You can create a greater margin, a greater differential, between your expenses and your income. Now, is it valid to say to someone that, you know, is it valid to say, "Well, you're stupid if you don't buy the latte every day, because if you enjoy the latte, you should do it, and you raise your income." Well, sure, that may be a lifestyle choice, and that's fine, but it still doesn't ignore the mathematical, that doesn't, there is still a mathematical reality that the lower the expenses and the higher the income and the greater the difference, the faster the results.

Could you lose weight eating pizza every day? Probably, if you figured out, you know, a way to restrict your calories to a level. Could you lose weight faster by eating pizza once a week versus every day? I would say so. Could you lose weight even faster by never eating pizza?

Probably so, but then you get into the behavior modification of, are you going to fall off the wagon? And because you went from eating pizza every day, three meals a day, to never eating pizza, now you're just miserable with life, and then you just say, "After a month, I quit and I give up, and I'm going to go back to eating pizza every day." Same thing with money.

So, the lower the expenses, everything else held equal, the faster the wealth building. And then the third aspect is, what's the rate of return on the investments? So, as I'm taking money from cash flow, allocating it, taking out the necessary expenses, putting those necessary expenses over, putting the surplus over into investments, what's the rate of return on my investments?

All else held equal, the higher the rate of return on investments, then the more wealth I will accumulate, the faster. Those are mathematical realities, not value judgment. Now, we can all try to differentiate ourselves and talk about, well, you know, the latte factor is the key point, or the latte factor is dumb.

These are pointless debates. You may choose what's best for you, and I may be more highly motivated by the idea of a high lifestyle, and so I'll set myself a major expenditure goal and say, "Hey, if I can achieve this income goal, then I'm going to spend this money, and that may motivate me to achieve that income goal." And that's totally valid.

On the other hand, you may say, "I don't care about that income goal. I'm going to trim my expenses down." But that doesn't change that this is mathematically true, and as far as I'm concerned, this is incontrovertible. If you find some way that I'm wrong, come by and tell me, and I'll have you on the show, and I'll admit it if you can show me that I'm wrong.

But all the rest of this is all philosophy, and that's valuable. That's good. You figure out what works for you. But you can get rich making a small amount of money and only spending a little bit, and you can get rich making a lot of money and spending a lot, as long as there's a differential between the two.

So I think I beat that point to the end of what it needs for today. That's everything I want to talk about with regard to the statement of financial condition or balance sheet. I never know which one to use for. I like statement because it makes me feel--I don't know.

If one of you accountants knows which one I should use or if you guys prefer, most people are more familiar with the term balance sheet, but I just like statement of financial condition. It makes me feel a little bit more account-y, business-y, and then I like to look and do this.

And I tell you, if you want to be motivated--now, I would imagine many of you will not do this, but if you're a nerd like me, why don't you create this formally? Use the template that I've given you. Put it into a nice document. Put a logo for your family at the top.

For me, it would be the Joshua Sheets Family Enterprise, and treat it like a business. I actually am making a switch for all you accounting nerds. I'm making a switch in my personal finances from single-entry accounting to double-entry accounting to work for my own personal household because I've fallen so in love with double-entry accounting in my business and I see the value of it.

I'm actually making a switch--I'm trying to make a switch over from my personal financial tracking from single-entry to double-entry. So if you don't know what that means, ignore it. I'll explain it in a future show, but I just think it's really--I think it makes me feel good. It makes me feel controlled and empowered.

So that's our show for today, and I appreciate your listening. It's been fun to bring it to you. I will plan some future shows here on--again, we'll do a show on preparing a statement of cash flows, and we'll talk through that. Reference, please, the document that's listed in the show notes and create your own based upon that.

Create a Google spreadsheet. Write it down on a piece of legal paper. This is step one of any kind of financial planning, and you can do this yourself. You can hire it done, but I would encourage you--consider the power of a financial statement. What you'll see is--just notice this, a thing that I have noticed.

The greatest investors in the world are always investors who--I mean, they look at the balance sheet, and they understand them. So that's our show for today. Before we go, I want to thank you all for the wonderful reviews that I'm getting. We've got some new reviews here, and let me get them pulled up here.

Okay, so this is a review from 0501, the title, "Five-Star Review, Advanced Financial Information. Joshua is providing excellent financial information to the masses in a positive way. A great podcast if you're looking to expand your financial knowledge past the basics." Thank you. Thank you so much. This one's called "Radical Stuff" by P.

Sheets. This is my brother. I got my brother, and then I think the next one is my dad. I got my brother and my dad to review my show. I said, "Listen, I need your help." So this is my brother. He says, "If you want to think outside the financial box, this is the place to get started." So thank you.

I appreciate that, P. Sheets. Next one here is--it says, "General Review, DCS." I think this is my dad. He has great information. "I would recommend these podcasts to anybody who is looking for a balanced view of financial matters. The information will help you make your own educated choices in the complex financial world we live in." Thank you, dad, if you're listening.

And the next one is, "A great presentation of lots of info. Five stars. I appreciate the variety of information that covers so many situations, some of which I've already used," which comes from H. Louisiana. Next one is, "Hertzke says, 'Great stuff. Nice to see someone take a financial approach to finance.

Easy to understand and follow and in touch with today's markets. Thank you.'" And the last one is, "Refreshing. By ATS1979. While there is so much information easily accessible in today's hyper tech-savvy world, filtering through the sand to get to the diamonds becomes an increasingly difficult task. Mr. Sheets combines technical expertise with deep thoughtfulness on common everyday issues, facing those of us who are striving to grow in our stewardship of resources and responsibilities as citizens, contributors, and beneficiaries of a complex and diverse economic system.

So excited to have found this podcast. Let's all be challenged to question the popular financial wisdom and lifestyle norms." That means the world to me, and I just really appreciate that review. Thank you very much. Keep the reviews coming. If you haven't done so, please leave me a review.

One star is fine. Five stars is fine. I would really love for this podcast to be able to be featured in iTunes. And to the best of my knowledge, the way that those formulas work is based upon the reviews, the ratings, and the downloads. And so I'm doing everything I can to try it.

I mean, I've got my brother and my dad to review my show. So I appreciate any help that you can provide. If you like the show, please review it. That would mean the world. You can do it right on your phone. Stay tuned for tomorrow's Q&A show. Give me your feedback on the show.

Tell me what you like, what you don't like. That will help me to tailor the content. I know we went deep today, but I hope it was worthwhile, and I hope it helped you to get a bigger idea of the way that accounting could work. Remember, with my financial show, I've got to get some sort of formal disclaimer.

I don't know why you're supposed to do disclaimers. I guess you're supposed to. I think it is important, but I don't know. It just seems really stupid to me to have to make a disclaimer. But when you're in the financial world, that's a big deal. So none of this is personal financial advice.

You should go and talk to a professional. Please, hopefully you can see the value that professionals could bring, the value of hiring an accountant or a bookkeeper to prepare your books every month. And just start running your life like a business. Do this for yourself if you want. Automate it for yourself.

That's awesome. Or hire it done. But before you do anything, go and consult a professional advisor. My goal is not to tell you what to do, but rather to give you some ideas and strategies to help you accomplish your goals. We'll be back tomorrow with Friday's Q&A show. See you then.

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