Original subtitles

So we're going to begin to explore a little bit of the mechanics of

creating and then reviewing our financial statements.

We'll begin to build up to understanding the different types of statements we

might look at, the importance of financial records, and

then in the next presentation following this one, we'll actually explore how we

analyze the data once we get it, in, crafted into these statements.

So let's start off why do we need records,

what's the importance of financial records?

We've talked about the importance of managing our cash flows and

we've talked about a little bit about how budgeting is

the key to financial success and really, how we've been using a calendar or

something visual like that, can help us to keep track and make sure we're doing it.

But records serve as a reference point from which us,

a financial advisor, someone we're trying to do business with can help

us make a map to get from where we are to where we're trying to go.

Oftentimes, we can think conceptually, that's financial security but

it can be very specific.

That might mean paying for graduate education, college education,

it might mean looking ahead trying to put money aside for

future things like a home purchase.

So, it also records evidence of progress we're making, our expenses, our assets,

it helps us to see whether or not things are growing, whether or

not things are shrinking.

Assets growing is a good thing, liability shrinking is a good thing.

So these are some of the things we want to talk about, and then also helps us to,

to help our service providers such as insurers or lenders,

to get a sense of how much resources we have or how much we need to insure.

So basic questions like, how much renter's insurance or homeowner's insurance do I

need to have, can help us a little bit by actually looking at a balance sheet and

seeing well, what are we worth?

What is the amount of things that we're trying to protect?

So let's begin by just briefly touching base on the types of records and

what we want to do and how we want to keep them.

So we can look here at our different financial statements that we've made, and

these are the ones, actually, that are made for us.

So things like IRA contribution receipts,

retirement plan contributions and statements, brokerage account statements.

There are all different financial services that of, are related to our investing.

Even our bank records.

So we often want to keep these a minimum of one year, often times permanently or

at least until the securities are sold if it's for individual stocks or

bonds, at least until those securities are sold and the taxes are paid or not paid,

maybe they weren't due.

We want to think about two final statements from anything, if we've paid

off a loan or an obligation that should be held typically for at least seven years.

Our check stubs, if we have any of those, right, should be maintained for one year.

A lot of times, with modern day electric banking or, and Check 21 legislation,

those funds, those checks are all kept virtually by the financial institutions,

so our individual records may be less important.

Still a good idea to keep them, though on place.

And again, a list of everything that we, everyone we do business with and

their contact information.

This is in case someone else needs to reach them on their behalf.

Right, it can be a scary thing if we were sick and unable to help ourselves for

a little while, someone may need to step in and

help to pay some of those bills, access some of those accounts, and they

wouldn't even know whom to call if we were unable to share that with them themselves.

And then of course, things like our homeowner's records, anything of the sort.

Oftentimes keeping these in a simple filing cabinet can be helpful, assuming

it's not just a big stack of papers shoved into a filing cabinet drawer.

But some semblance of organization can actually make this useful for you.

And that's one of the things I urge people to do.

Certain statements, like the names and

addresses of individuals we do business with,

some of our final statements, some of our main access and identity statements,

things like birth certificates, we want to keep these in a fireproof box or

a safety deposit box that might be with a financial institution locally held for us.

So, keeping track of those types of records can be very helpful.

So, as always too, any Social Security papers we might have,

any passports we might have, any copies of critical letters,

letters of appointment or resignation, legal notifications, all of

these things that we want to keep really, forever as long as we possibly can.

Certainly there could, they could be useful at any point in our in

lives over the course of decades actually, and all of these are things that we

want to keep relatively safe in something like a fire proof box,

a safety deposit box, or similar.

So we want to think a little bit about that,

of course, in getting a sense of making sure that we have those in place.

We're going to focus, though, the rest of today on personal financial statements,

and these are ones that while software may be creating for us,

these are ones that we are originating from our own self.

So the most common ones that we're going to talk about, balance sheets,

budgets, and income and expenditure statements are a great example of these.

We'll show you some brief examples and

a reminder that we have an Excel file available with a template that you

can download from this module to utilize in setting up your own statement.

So we won't ask you to start from scratch, you can use our template,

which you'll see on display here, in this discussion.

So the balance sheet, right?

Let's just get a sense of this, itemizes what we own.

Number one.

So these are often what we think of in terms of assets, what we own.

They can be liquid financial assets, invested assets, physical assets, and

physical assets are going to be things that have a fair market value,

meaning that there is a price that someone would pay for

that asset and one that someone would accept for it.

Now that's really important because not everything physical we have,

really should go on a balance sheet.

I like my hat a lot, really doesn't have a fair market value that we would place it

on a balance sheet at all.

The other side of the balance sheet, the balance portion,

right, itemizes what we owe, so this can include our short term liabilities,

our intermediate liabilities and our longer term liabilities.

Short term would include things like the bills we have that are due.

Intermediate liabilities would be things that are due over the next few

years, perhaps.

Credit cards are a good example of this.

And long term liabilities are things that we're going to be paying on for

a little while.

Common examples include student loans and mortgages.

So the idea with a balance sheet, right,

is on one side we have our assets, on the other side we have our liabilities, and

our liabilities plus our net worth should equal our assets, so again,

and just to rephrase that then, assets minus liabilities equals net worth.

And that's an important number to go by.

Net worth is really our pulse of how we're doing financially.

If we own more than what we owe, we have a positive net worth.

And we want to strive, as always, to be increasing that net worth over time.

At the very least, we want to be concerned if our net worth is going down.

And it's going down because we're spending assets down, or

we're taking on too many liabilities.

So let's get a sense of some of these things here.

So when we talked about liquid assets right,

cash coming from an ATM machine is a great example of liquid financial assets.

401Ks, IRAs, right, are good examples of invested assets.

Home, a boat, these are good physical assets that we might think about.

And then of course we have things that where bills were due, we have credit cards

that might be due as well, those are those intermediate liabilities.

And of course the home once again,

in this case we're talking about the home mortgage.

So this just helps to put a little bit of a visual reminder for

the types of things we're talking about.

When we discuss liquid assets, invested assets, physical assets,

and then of course short term, intermediate, and long term liabilities.

What we own and what we owe, the difference between the two is net worth.

So a simple example of a balance sheet, right?

Again, you can take a look at where this would start.

Liquid assets right here, savings and

checking accounts, invested assets might include a Roth IRA and a 401k.

And of course physical assets right here,

your car, your home, any personal property that should count for here.

This could include things like jewelry, for example, would be another one.

So all of these things are going to add up at the bottom to our total assets, 'kay?

So this represents everything that we own.

On the other side we have our liabilities, our monthly bills that are due,

our credit cards.

You might have a credit card here as well if it's a little higher than what we

would pay off in the short run.

And long term might include things like mortgage or student loans.

Add those up there, we get our total liabilities.

The difference between the two, and the spreadsheet does this part for

you, is our net worth, our personal equity.

The amount of money we would have left over if we took everything we owned,

paid off everything we owed.

Right? That's the difference that's left.

We've talked about budgeting before,

remember a budget is simply a projection of our cash inflow.

Income from a job, income from investments, right?

If you're a full time student your cash inflow might actually

include a stipend that you're receiving as well because of graduate school.

Some students will include loan distributions but

I want to caution you on this, a loan is never income.

It is cash inflow, it does explain how you're paying your bills, but

let's never confuse it and call it income as a result.

And of course a budget also contained our projection of our cash outflows as well.

The income and expense statement is going to look a lot like a budget.

In fact, they're typically going to appear on the same statement where we

have budgeted expenses or projected expenses versus actual expenses.

So, the income and expense statement will be a record of our cash inflows,

a record of our cash inflows, cash outflows.

And we really want to see, how do these two line up?

Were we on target with our income projections?

Were we on target with our expense projections?

Getting a sense of how those things are really matching up, and again,

consider whether or not we need to manage our flows.

Right? Go back to our previous discussion.

If this isn't matching up, if we're not budgeting the right amounts for

what we're actually spending, we certainly want to change our budget, if need be.

But we also want to understand,

is this period of spending a fluke, or is it really the norm?

And so, if our, if it's the norm, our budget needs to consider that.

If it's a fluke, then we need to think about how we plan better so

that we don't get surprised by, our expenses when they actually come up.

So a simple sample of something like this, our income levels again, salaries, wages,

you might have investment income, scholarships and

grants you might be receiving.

These are different than loans because they are money you're receiving that

you won't have to pay back.

And of course, you might even be entitled to social security benefits.

This could be from survivor's benefits, if you've lost a loved one.

This could be for disability, for permanent or

partial disability, and of course or retirement someday.

For our expenses, note we had fixed expenses, mortgage, or

obviously we could put rent here if that's more appropriate, car insurance,

homeowner's or renter's insurance, taxes, we're going to have to pay,

and then our variable and flexible expenses, food,

utilities, clothing, and then the difference between the two.

Total income minus total expenses gives us surplus or deficit.

In other words,

are we making enough money to meet all our obligations, or not enough?

This is really beneficial, especially as you're just starting out,

to do this month by month.

Right? It may seem tedious, but

if we go six months at a time, we can end up not seeing something that's getting us,

digging us a hole, if you will.

Right? If we're constantly falling behind every

month, that hole that

we're digging ourselves into financially is just going to get bigger.

So if we're keeping track of this from month to month, at least in the beginning,

we can make sure that that hole doesn't get any bigger, and in fact we can

make sure we get out of that as quickly as possible through proper planning,

control, and management.

Visuals can be really helpful here.

I like to look at them.

i think they're very helpful so you can use these for

your expenses, see where your money's going.

Right, how, what percentage are we spending on it?

Now we showed earlier a table that just said how much we ought to spend.

That's pretty helpful, but it can also be helpful to kind of see from the magnitude

of expenses which things really are taking up the bulk of your money.

So is it housing?

Is it food?

Right? Is it healthcare?

So any one of these things are, ex, are what we want to map out and

get a sense of.

Is that too much?

Are we spending too high of a proportion on it?

Assets too.

Looking to see what our money's made up of.

So this can be in the form of savings, checking, Roth IRA, cars, homes.

So again, looking at all of these and

trying to get a sense of saying, what makes up the stuff that I own?

Is it more physical assets,

is it more stuff, is it money, is it money that's working for me,right?

Those 401Ks and IRAs are money that's working for me.

It's invested right?

Or is it liquid where it's useful for me to pay my bills, but is it too much?

So getting a sense of how that breaks down can again, help us to see whether or

not we should make some changes to our financial structure.

Liabilities is another one too,

to look at, again, are we spending too much of our money?

Do we have more consumer debt than we do strategic debt and

we'll spend some time talking about credit, but

suffice it to say that when not all credit is created equal.

When we buy a home, for example, that was appropriately priced for

our income range, we might often take out a mortgage.

Well, that can be a strategic use of debt.

Borrowing some money to get an appropriate degree so

that you can advance your human capital and get a higher paying job, that student

loan can be a strategic investment, but buying something because it's on sale and

you really, really wanted it anyways, not a strategic use of credit.

So we want to get a sense of whether or not we're using more consumer credit

versus more strategic or long term or asset based credit.

Including our human wealth so visuals can help us to see that too.

And again Excel, which is one of the software packages we're using to

simply look at our financial statements lends itself very nicely to taking

the data we enter in and turning them into financial statements themselves or

turning them into financial charts.

We're going to go deeper.

This is a little preview for the next presentation, right.

As always, we've simply touched the tip of the iceberg with financial statements.

We actually can go quite a bit deeper.

In the next presentation, we're going to see how we

answer these really important questions for us using financial ratios.

And that is, we're going to ask ourselves three very important questions.

Do we have enough money to meet our obligations?

Which is analyzing liquidity.

In other words,

can we meet our current obligations now, and if something bad happened?

We're going to analyze debt, how our debt looks relative to our cash flows.

How it looks relative to our asset base, and get a sense of some benchmarks.

How much is too much?

And lastly analyzing productivity, looking at how much we're saving and

looking at how our net worth changes from one time period to the next,

does it go up or does it go down?

So, that'll be a little preview ahead for

what we're going to take a look at next time, but in the meantime, make sure you

review and are comfortable with how you set up your own financial statements and

check out the Microsoft Excel spreadsheets that you can utilize to create your own.

Thanks.