Financial Freedom – Understanding Financial Statements

Ever wonder how people can become financially free?

Yeah, you have heard stories about your neighbor’s, uncle’s, best friend’s, friend traveling when he wants to where ever he wants; doing activities he wants to do on his own terms.  Often times those type of people get labeled as the “financially free.”

Financially free is when you have more money coming in than money flowing out by “working” significantly less or on your terms.

How do people accomplish this, and how can you?

Step one is understanding your income statement(s) and balance sheet(s); and how they coordinate with each other.

Just recently, for the second time, I finished reading three of Robert Kiyosaki’s, “Rich Dad, Poor Dad” books.  These are three of my favorite all time books, reason being – he does a hell of a job making you understand these financial statements and how they really do apply to the type of life you live.

(All of the following graphics are from Robert Kiyosaki’s books)

The graphic above shows four different ways you can have an income.  To be financially free, you ideally want to be on the right side of the quadrant. The “B” and “I” quadrants mean you do not have to be present to have an income, it is literally your money working for you.  You also are allowed certain (legal) tax breaks that the left side of the quadrant does not have access too.

For example.  Those who fall on the right side of the quadrant can invest in paper assets (stocks), real estate, etc, etc, with before-tax dollars while those who fall on the left have much less to invest because they must use after-tax dollars. (One of the MANY examples)

Where do you currently fall?  Where do you want to end up?

The top two, vertical boxes in the above graph resemble an income statement.  The bottom two horizontal boxes resemble a balance sheet.  This graphic shows a person who has, or is on their way to, financial freedom.

Do you see why?

Their income comes from assets such as, a rental property. They take the income from the rental property and pay the mortgage, taxes, insurance and all other expenses (which also deducts their taxable income) that come with owning property, distribute some to themselves, and reinvest the rest into their asset column.  This is why the “rich get richer.”

Who’s financial statement is above?

It certainly looks like someone who may be caught in the “rat race.”  This person has one source of income, and that is as an employee.  They do not have any income from assets, a business.  They might be struggling month to month with bills, car, house/rent, credit card payments, etc, etc.  Not to mention, they have to answer to a boss.

So how can this person turn their balance sheet around?

One way might be by taking a passion, starting a business and running it part-time to begin with.  Once they begin to get a positive cash flow from their idea, from their passion, they can take before-tax dollars and invest it into their asset column and they are well on their way.  They have begun their journey towards financial freedom.

I definitely recommend Robert Kiyosaki’s books and reading them in this order:

Rich Dad, Poor Dad          Rich Dad’s Cashflow Quadrant          Rich Dad’s Guide to Investing

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3 thoughts on “Financial Freedom – Understanding Financial Statements

  1. Pingback: One Day; $28,000 | Greater Than > Athletes

  2. Pingback: How a dork checkup his financials like a doctor! | The Freedom Figthers

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