A lot of people shy away from any talk about “finance” or “accounting” because (1) its boring (2) it involves math and (3) its hard work.
Well it’s not as bad as you think. I’m going to show you how to understand financial statements in about 5 minutes. Then I’m going to give you some Excel templates to create your own. (See the video demo at the end.)
But first…
Why Should You Create A Personal Financial Statement?
If you wanted to lose weight, you’d have to weigh yourself right? If you wanted to be a great race car driver, you’d have to time your laps.
Well if you want to get rich (or become financially free), you have to create financial statements.
You are a business. You have money come in and you have money going out. You have things that you own and things that you owe.
If you don’t have a way to MEASURE progress and COMPARE what works and what doesn’t, then you are just wandering blindly in the dark.
Robert Kiyosaki talks a lot about this, how rich people are “financially literate” and how this should be taught in schools. That way we wouldn’t have so many Americans in credit card debt, losing their homes, and retiring flat broke only to become a burden on their families.
But that is another story. The thing to remember is that something MAGICAL happens when you start to measure your progress. Your success rate goes through the roof.
If you aren’t looking at your financials about once a month then you quite simply AREN’T serious about becoming rich. (You can pay a bookkeeper or accountant to do it as well if you don’t want to go through the process below.)
Understanding Financial Statements In 5 Minutes
I’ve tutored about a dozen people in MBA level finance and accounting courses. Here is the explanation that seems to work the best.
There are only two types of financial statements that you really need to know: a balance sheet and an income statement.

BALANCE SHEET
- Shows what you own (assets) and what you owe (liabilities)
- The difference between these two (assets - liabilities) is your net worth.
- Shows one particular MOMENT in time, a “snapshot” if you will.
Click the thumbnail to the right to see an example. As you can see, the money in your bank account, the market value of any property you own, your car (if you own it outright), and stocks are all examples of assets. Mortgages, car payments, credit card debt, and other loans are all liabilities. The difference is your net worth. Notice how it says a specific day in January and not just “January 2008″ because a balance sheet refers to one moment in time, not a period of time like a month.
February and March haven’t been filled out yet, but if you spent a few minutes once a month putting in those numbers you can see how easy it would be to track your progress month to month.

INCOME STATEMENT
- Shows where money is coming in (income) and where money is going out (expenses)
- The difference between these two (income - expenses) is your net income.
- Shows what happened over a PERIOD of time, instead of how things are at one moment like a balance sheet.
Again, click the thumbnail to the right to see an example income statement. For most people the primary source of income is their job so you might have that first. After that you can see the income from those two properties listed on the balance sheet, as well as income from a small business you started, just as an example. Secondly, you see expenses broken down by category and net income at the end. I’ll show you how to quickly categorize your expenses in a minute.
Notice how in the second month your cash flow is negative and the number appears red. Negative cash flow is bad! It means you are spending more than you’re earning, and that is the way toward bankruptcy, not financial freedom. If you hadn’t made your financial statement that month would you have ever know this? Probably not.
Thats it. Not as scary as you thought right? On corporate financial statements you will sometimes see some strange terminology, but the basic concept is the same as for this personal financial statement. Balance sheet: what you own, what you owe. Income statement: what you made, what you spent.
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