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YOUR PERSONAL FINANCIAL STATEMENT AND YOUR FINANCIAL FUTURE

by | Nov 10, 2021 | 0 comments

Usually, people start by earning more money than their bills, over time the dynamic reverses and bills surpass incomes, as they begin to amass bill on bill. A statistic has reported that from this point forward only about 12% of working professionals will reverse the equation, of these, only 3% reach financial independence.
Everyone desires financial freedom and financial independence. Financial freedom has been defined as ‘having enough savings, financial investments, and cash on hand to afford the kind of life we desire for ourselves and our families’. In other words, it means minimal reliance on debt.
Now financial independence as opposed to financial freedom is defined as ‘the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income’. They are two different concepts, but in an orderly world one comes before the other – financial Freedom, then financial independence.
Your personal financial statement
In this discussion we will look at how your personal financial statement can be a tool to achieving your financial future of financial freedom and financial independence.
So, what is a personal financial statement? It is a report on your financial health. We will discuss it as what you earn, what you spend, what you own and what you owe. What you own and what you owe make up your personal balance sheet and what you earn and what you spend make up your personal income statement.
What you own and what you owe
This describes your personal statement of financial position or balance sheet.
What you own are assets or property that belong to you. Assets typically require a lot of money to buy, and they usually last a long time too. Some assets can generate income for you, while some can generate expenses. Ensure you own things that are valuable enough to generate passive income for you.
Whereas what you owe are borrowings that you are obligated to pay at some time in the future. They could include soft loans from friends and family that bear no interest charges. Or they could be outright loans on which you have to pay interest. Interest charges have the effect of making what you use the loan for more expensive in an invisible way.
What you owe can simply be classified as lifestyle loans or investment loans. Lifestyle loans are loans that are contracted just for consumption and the repayment is from your future income – essentially spending tomorrow’s money, today. Investment loans on the other hand are debts taken for use in a productive venture that can repay the debt and live a profit to the debtor.
• Income generating assets earn you passive income, they include, rental property, financial assets such as Shares, Treasury bills, Bonds, Banks Placement, Mutual Funds etc.
• Expense generating assets routinely cost you money, which is recurrent in most cases. For instance, you need to constantly fuel your car and pay for services, pay for cable TV, if you own a decoder, land use charge if you own a residential-only property or a condo.
• Non-earning assets refers to your personal effects e.g., Haute Couture, etc. these are expensive to acquire but have little earning capacity
To be in a good position in your journey to financial freedom, what you own must be always greater than what you owe. Furthermore, investment loans are more desirable than lifestyle loans.
If your what you own minus what you owe equation is negative, you will have negative net worth. This means that if all your assets are sold to pay your debt, you will still be owing – this is not where you want to find yourself. But this is how a perpetual debt cycle begins taking you farther away from financial freedom.

…to be continued.

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Author
Temitope Julius