Wednesday, 2 November 2016

Moneywise 23: How to prepare your personal financial statement


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Renowned Finance & Economy Analyst, Mr. Femi Awoyemi, Publisher www.proshareng.com


It was obvious Dele was shocked when my Mentor asked him about his personal financial statement; “personal financial statement? What is so called?” Dele asked obviously puzzled.

My Mentor took time to explain the concept: “My friend, you must learn this. It is impossible to take control of your financial destiny without first learning how to develop a written personal financial statement. It is not enough to be able to mentally picture how much is in your bank account, how much you are giving your wife for household expenses, how much debts are on your neck, how much money flows into your pocket regularly. It is not enough to know all these mentally; you have to lay it down visually and in writing.
And that is what the author of Habakkuk is impressing on us. Having your personal financial statement written out enables you to discover very quickly what you cannot detect were you to carry that information about in your head” He paused.

“There are three sets of documents you have to get familiar with if you intend to prepare a sound personal financial statement”.
“They only know there is a crisis when they suddenly discover that source of income is gone. They fall flat on their face because there is no back up. A wise man should keep his day job while he uses his after office hours productively to generate layer two and three incomes. It is also wise to put your money on things that can generate income for you in the future”.
The Personal Balance Sheet: This is simply a snapshot of what you own (assets), and of the funds related to those assets. This is worked out at fixed intervals—monthly, quarterly or yearly. The personal balance sheet enables you to determine how much you are worth after balancing your assets and liabilities”.

The personal Income Statement: “This simply shows how much you gain or lose in the process of carrying out your personal financial transactions. It gauges total income adjusted for the money you spent in generating the income. Cash flow (C/F) statement: This is a very helpful document as it enables you to trace the uses of your money and their sources. A simple rule to remember is that money flows out when you receive a cheque or cash and it flows out when you issue out a cheque or give out cash”.

Income statement: “Although information contained in personal income statement varies from individual to individual, the following broad headings are generally applicable”.

Layer 1 Income: “These cover money that flows from your workplace. These would include salaries plus allowances, performance bonuses and commission obtained from selling company related products”.

Layer 2 Income: “These cover incomes that flow from  business transactions outside your present  job. These would include what is called “pp”, personal consulting, first level network marketing and self-run businesses. The distinguishing characteristic of this category of incomes, sometimes called linear income, is that you  have to be personally involved for the income to keep coming”.

Layer 3 Income: “If it works out well, incomes from the source do not require your involvement for money to keep coming in. They come in whether you are asleep, walking, flying or even out of reach. These would include returns from a business with a solid system, dividends from investment, interest from deposits and savings, rental incomes, income from second level network marketing”.

Layer 4 Incomes: “These cover sources of revenue not accommodated by the other three”.

Routine expenses: “These cover those regular spending on items such as household items, children school fees and others which we must as a matter of necessity address”.

Personal Investment expenditure: “These cover items that are meant to sharpen our intellect and increase our ability to generate more income, like building skills on how to speak and write well”.

Business and Investment Expenditure: “These cover the money you spend on items that can bring you streams of income later. Spending to build businesses, investment in shares, for instance, will qualify for this heading”.

Balance Sheet: “It is a snapshot of what the company owns and what it owes at a particular point in time”.

Assets: “Assets are generally things which you own and can lay claim to, but especially those that bring money to your pockets regularly”.

Liquid assets: “These are things which you own and you can quickly convert them to cash when you desire”.

Business/Investment assets: “They are also things owned but which take longer time to convert to cash. They however generate higher returns than liquid assets”.

Personal assets: “They are what we own but do not generate any financial return, at least directly. Some are actually liabilities disguised as assets”.

General tips
“Let me explain the importance of this exercise to you. The number one source of financial crisis is a failure to understand the sources of income you earn and where you spend the money. Some only concentrate on what comes in from layer one not using their spare time to build other sources of income”.

“They only know there is a crisis when they suddenly discover that source of income is gone. They fall flat on their face because there is no back up. A wise man should keep his day job while he uses his after office hours productively to generate layer two and three incomes. It is also wise to put your money on things that can generate income for you in the future”.
Ayo Arowolo, Publisher The Millionaires' Capsules

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