The most important financial statement is your own; what you earn and what you spend.
So how much do you earn? And how much do you spend?
Creating and keeping up-to-date your financial statement is your first step to financial freedom because it gives you a baseline for where you are financially as of right now. It tells you where you are now so you know what to do from there.
It gives you insight to the things you’re doing well and the things that need some improving.
Don’t be too harsh :/
Just promise yourself one thing before you create your financial statement, don’t judge yourself. Everyone starts somewhere, but what makes you different between you and your poor friends is that you’ve started. Michael Jordan wasn’t born a basketball legend, so don’t be harsh on yourself if you’re not a financial guru.
Your Income Column
Income is the money that you receive and there are a few different kinds:
Your earned income is any 50% income you earn from work. Passive income is any system or product you own that earns you income without much work. Passive income earns you money in your sleep essentially. Your portfolio income is any income in investments like paper assets.
If you own any assets, especially ones that produce passive income, be sure to add it all in this column.
Your Liabilities Column
Liabilities are things that cost you money, so any expenses you pay each month. This includes anything from rent/mortgage to student loans to food or fun money.
Since I still have a job, I like to split my liabilities into a per month column and then a per week column. I get paid biweekly so this helps me track and plan my money better so I can put more of it towards investments and forms of passive income.
You don’t have to do this, but it definitely has its advantages for those who earn biweekly. The whole point of your statement is to see what you spend as easily as possible so do whatever you need to in order to see your expenses and incomes easily.
Once you’ve totalled your income and liabilities columns, subtract your liabilities from income to give you your cashflow.
Cashflow is probably the most important word you can start incorporating into your every day life because positive and negative cashflow is the difference between the rich and the poor. If you make more money than you spend, you’re obviously in the positive. If you spend more money than you make, then you’re in the negative.
You have homework.
You can’t just read and expect to learn 100%, you must start doing and start failing. The traditional school system has taught us that failure is bad, but failure is the best thing that you can do because that’s when you know for sure what works and what doesn’t.
It seems odd, but you’re better off learning what not to do than taking a gander at what will probably give you results.
Look at the homework assignments and start putting in the work. This will help you mold your mind and reinforce the changes you are trying to make on your way to growing your wealth.
1) Create your financial statement and calculate your cashflow. What does it look like? Positive or negative?
If you’re cashflow is negative, your goal right now is to increase your income. Get a second job if you have to, but get used to operating in the positive.
If you’re cashflow is positive, proceed to assignment 2.
2) Looking at your financial statement, where does majority of your income come from? If your income is earned income, your goal is to find ways to earn income passively.Make a list of 20 ways to earn passive income.
Really push your brain to be creative. Your best ideas will probably be 15-20 so really push yourself.
You’re pushing your context to places it’s never been before and it will feel uncomfortable, but if you make small steps now, you will become more comfortable with your new context.
If you do have some portfolio or passive income, proceed to assignment 3.
3) Ask yourself, how can you be more generous? If you earn passive income from a blog or business, how can you help more people? Make a list of 20 ways you can help more people. Don’t forget that you can volunteer or donate to charities. Focus on thinking outside the box because like I said before, your best ideas will probably be 15-20.
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Should you get a job right now, or jump into the deep end with your own company? That's today's question from a reader:
"I've gotten a few offers with startups run by very smart and successful people and am torn between working for a bit, learning and making some money vs hustling on the side to bootstrap my company. What do you think are the potential downsides (if any) to trying to hustle my way to bootstrapping my startup? What do you think would be the potential positives of taking a job?"
I've never had a job, so I'm biased. If you can afford it, the skills of working for yourself translate very well into the continued skills of working for yourself. The advantage of a job though, are (1) you get paid to learn the domain knowledge from people who already get it, (2) you get to see well-running policies and structures in practice which can be a huge-time saver later, and of course (3) you're more guaranteed to get enough pay to stabilize or build up a bankroll.
Of course, #2 can be as much of a curse as a blessing, because you can learn "the way things are" and not imagine to do bigger/better later. Most of the times it's more work re-inventing the wheel, but if you're creative you'll frequently improve upon past designs of people.