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.

Why Quicken and Microsoft Money Suck
Read the rest of this entry »

It bothers me when I see people using the touch pad on their laptop while at a desk for long periods of time. I’ve never seen an official study done on it, but I’d guess that you are 25 to 30% faster using a regular external mouse instead of a touch pad. The touch pad is only there for when you are on the move and don’t have access to anything else!

Ask someone what the three most important things in their life are, and in some order you will probably hear: health, wealth, and relationships. The later includes friends, family, and lovers.

Is your job helping you improve each of these areas?

Health: Chances are your job is the biggest source of stress in your life, could be preventing you from getting enough sleep, and forces you to eat unhealthy food while on the go.

Wealth: The story that we’ve all been told as children (work hard in school, get a good job, work and save for 40 years) is a lie. More than 80% of Americans end up flat broke in old age, totally dependent on others, and praying that they die before their money runs out. Having a job is a way to make a living, not build wealth.

Relationships: Spending 1/3 of your life at work means you can form great relationships with colleagues (although you rarely get to choose which colleagues you spend time with), but also means your time is limited with the others in your life.

Starting to work for yourself instead of being a slave to your job poses some interesting opportunities:

• A chance to build wealth as a business owner instead of being a wage slave
• Reduced stress, no rush hour traffic, no boss, no annoying colleagues
• The time to exercise regularly, shop for healthy food, and eat without being rushed
• The ability to get enough sleep
• More time with your family, friends, and lovers
• The chance to meet more new people
• An opportunity to work on what you want, instead of what is assigned to you
• As many vacation days as you’d like
• More control over what you do with your time every day of your life!

Hey Brian,

I absolutely love your real estate articles. I have studied Rich Poor Dad’s stuff as well as many other books and REI programs.

Can you elaborate on how you are finding deals?

Thanks, K.T.

Hey K.T.,

I am finding deals two ways.

First, I am finding them on basic old har.com (Houston’s MLS website, your city probably has something similar). Some people assume there is a magical list of deals somewhere that isn’t accessible to the general public. But there are great deals showing up regularly on the biggest public website. They don’t last long, so you’ve go to know what to look for and move quickly. I’ve put together a little video that shows the process I actually go through here:

[youtube]http://www.youtube.com/watch?v=e8AdQ-MGL7w[/youtube]

Most of these techniques I’ve learned from a group of real estate investors here in Houston. Most major cities has an MLS website like har.com in Houston were 95% of all residential real estate listings end up. You can find yours most likely by typing “mls real estate [your city name]” into Google or asking others in the real estate industry.

Read the rest of this entry »

Brian, from a personal viewpoint I would love to see more on turning an idea for generating passive income into reality. I have dabbled with a few small things and had no success.
-David

David,

I sympathize with your comment, and I believe many people have the same frustration. Unfortunately there are a ton of people out there marketing the IDEA of financial freedom, without being able to deliver on the results.

The way I evaluate any claim behind a method of building wealth or generating passive income is this: how many people can I find who have used this method to accomplish what I’m trying to do?

Let’s take a look at some common areas that promise the dream of passive income, and I can give you some thoughts on each. Most if not all of these I have dabbled in myself just as you have, with mixed results.

First a quick note: to “break free” you don’t necessarily need to generate passive income. Breaking Free is first about finding work that you really enjoy (which for many people means having the freedom of owning your own business). However, achieving what I call “financial freedom” (your passive income exceeds your expenses and you no longer need to work unless you want to) is another step beyond that which is more challenging and often more rewarding.

Blogging

I like the idea of blogging, I’m a blogger myself, and I think it is doing brilliant things for social media around the world. But let’s not mince words: blogging does not generate passive income.

Blogging is work. Granted it’s very enjoyable to some people and doesn’t feel like work, but it certainly can take up a significant amount of your time.

People love to cite Steve Pavlina as a case study in successful blogging, primarily because he earns over $1000/day. That is a lot of money, but Steve still “works” on the site making regular posts and has stated that “I happen to agree with those who say that 99% of people who try to generate serious income from their blogs will fail.”

The numbers tend to agree with him, and don’t look good by my evaluation standard I mentioned at the beginning. There aren’t very many bloggers earning even six figures (perhaps fewer than 20 in the world) and you could probably count the number of blogging millionaires on one hand. Moreover, the bloggers who are most successful seem to spend a huge amount of time (which by definition is not passive) reading, posting, and marketing just as I did when I first marketed this website.

There are exceptions. Yaro Starak is one person in particular who I’ve seen try to making blogging more passive with a site he purchased called SmallBusinessBranding.com. All of the posts are by guest authors, meaning he doesn’t write them himself. The site is growing and I don’t have any idea how much of his time it takes, or how much money it makes him (probably $500/month if I had to guess) but it’s an interesting experiment in making blogging more passive.

As of yet I remain unconvinced on blogging as a passive income tool. Should you start a blog though? Absolutely, I think everyone should because it has a number of benefits. Just don’t plan on having it pay your bills without putting some serious work into it on an ongoing basis!

Stay tuned for part 2, 3, 4, and 5 as I explore other methods of generating passive income (eBooks & Info Products, Virtual Real Estate, MLM & Network Marketing, Options, and Physical Real Estate).

It’s time for a follow up to see how effective my sales page redesign was from a few weeks ago.

First lets take a snap shot of the two weeks prior to changing the sales page, July 11th through July 25th.

• 685 Unique Views of the sales page
• 21 Books Sold
• 3.1% Conversion Rate

I’ll skip the 26th since that was the day I made all the changes. So let’s look at July 27th through August 9th (almost a full two weeks) as the next snap shot:

• 314 Unique Views of the new sales page
• 8 Books Sold
• 2.5% Conversion Rate

Most people will jump to an incorrect conclusion when seeings numbers such as these.

Read the rest of this entry »

I’ve gotten some good mentors lately in real estate. One of them is the CEO of the largest commercial real estate firm in Houston, and I’m also working with a whole group of investors at LifeStyles Unlimited, several of which own thousands of units and are multi-millionaires.

I’m not an experienced investor yet (working on my second deal now), but here are a few misconceptions I had about real estate that have been completely shattered for me lately.

Myth #1: Debt is bad. Pay off your mortgage so you can own your property!

Most of us have heard this since we were little. Don’t get into debt! This statement was true, but it didn’t tell the whole story.

You see, consumer debt is what can be bad. We have a nation full of people who can’t pay off their credit cards driving around in cars they can’t afford, and it’s terrible thing.

But in investing, debt is actually a good thing because it gives you an incredible power called leverage. Let’s say you put $10k down to buy a $100k house that earned $200/month in cash flow.

You’d get $200 * 12 = $2,400 per year on your $10k investment for a 24% return.

But if you put 20% down instead or slowly paid off the mortgage over the years until you had $20k in the property. You get the same cash flow of $200/month but $2,400 on $20k is only a 12% return. That’s half as good.

The more of your money that’s tied up in the property, the worse return you will get. Any time you can borrow money at a lower interest rate, and use it to get a higher rate of return, you should stay in debt. Debt is a great tool for building wealth.

Read the rest of this entry »

I’m really starting to embrace this passive income idea. Right now I’m relaxing by the pool with my laptop and my only goal for the entire day has been to cook some pan cakes, watch some Entourage, and go to a birthday party tonight.

But I thought I’d take a minute to write a quick post here about a game I’ve been playing lately called Cash Flow (aff).

It’s an educational board game created by Robert Kiyosaki, of Rich Dad Poor Dad fame, that is designed to teach you financial literacy. People get intense when playing it, pulling out calculators, and negotiating deals…sort of like monopoly on steroids.

I don’t recommend buying the game, because it’s expensive and you’ll probably have trouble finding people who want to play it with you anyway, but you may want to check if there is a cash flow Meetup.com group in your area that plays it.

When I first played it, I underestimated how complex it was (it seemed too easy).

Read the rest of this entry »

I like to think a lot about passive income. That’s the ultimate dream right? To just travel the world, focus on whatever you feel like, and pick up a check each month from your investments or business.

Robert Kiyosaki makes a great point about this in Cash Flow Quadrant (aff), as have many other authors, that just because you’re self-employed it doesn’t mean you are financially free. Many entrepreneurs end up buying themselves a job - sure they don’t have a boss, but they are still putting in 10-12 hours per day. (Typical examples include shop owners, or businesses where you are the primary talent, like consultants, etc).

But, I’m starting to realize that it’s not a clear answer most of the time whether income is passive or not. It typically exists along a spectrum, and I like to find out where it is on the spectrum by asking this question: If you were to disappear to Tahiti, how long would you continue to earn money?

Here are some examples along the spectrum…

• A blue collar job - only paid when you clock in, you don’t get paid for even 1 minute you aren’t there.
• A white collar job - you could sneak in late or take a long lunch (a few hours), but you also get time off for sick leave, and vacation…so a few weeks in some cases
• Mom & Pop shop owner - You’ve got to be there each day to open and to close, so typically no more than a day or two if you can get someone to cover for you.
• Mom & Pop shop owner with management (or kids) - once they get management, they make a lot less money, but could potentially disappear for a few weeks to a month. The problem is that if you leave for much longer than that, the business will start to deteriorate. Theft, dirt & grime, laziness of employees, etc start to creep in. Only what’s measured gets done.
• Self-employed business owner - this is like my tutoring business…it would continue to earn money for a month or so if I disappeared, but income would steadily decline as I wasn’t bringing in new clients, sending paychecks, etc.
• Owning real estate that you manage yourself - Could last six months probably without you doing anything, but it may not be prudent to do so. Tenants would call with repairs, could miss rent, etc. Some upkeep is required.
• Owning real estate with a management company - Could disappear for a year or so and the checks would continue to come in. You may need to be called once in a while for massive repairs, lawsuits, or insurance claims (fairly rare events).
• Passive investor - As a passive investor (think large appartment buildings, shopping centers, hedgefunds, REITS, stocks, LLC’s, LLP’s, etc) you could literally disappear for several years, having never seen the business, and you wouldn’t need to feel guilty. It’s someone else’s job to manage the project day to day.
• Handing all your money to a financial planner - again, several years.

This is part of the reason I’m transitioning more and more into real estate right now (it has other factors like rate of return and tax benefits that I think make it better than stocks or typical financial planner type investments too).

Some of the mentors I’m working with own apartment complexes that they literally haven’t been to in years. They don’t have a key to the place. They wouldn’t even know how to get on the property if they had to. Their phone number isn’t listed on any registry of people to call. And that’s exactly how they want it!

How long could you disappear from you current (or ideal) job, and continue to earn money?

This is the conclusion of my 30 day marketing challenge where I’ll share with you some of the results; both what worked and what didn’t.

All the graphs below show a two months range: the month before the marketing challenge started, and the month of the marketing challenge.

Here are the page views for the last two months. As you can see, thing picked up substantially (and fluctuated) after the marketing challenge was started, with the biggest day being early on with 2,191 views in a day. This was due to lots of people linking to my LifeHack.org article on power napping.

Read the rest of this entry »