Moneywise 23: How to prepare your personal financial statement

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

“Preparing a personal financial statement needs not be
a tough exercise. Just about anybody who is diligent enough can put one
together effortlessly. Let me give you some few tips that should make the
exercise fairly easy”.
Invest the necessary time: “Only few people set some specific time
aside to focus on personal financial matters. No wonder there are tales of
personal financial crisis around. You must be willing to devote a minimum of
three weeks to this exercise for it to yield meaningful result”.
Involve your spouse: “Two good heads they say, are better than
one. I have found this to be true in the preparation of a personal financial
statement. You have to work closely with your spouse. Many of my proteges who
followed this advice reported improved communication in their family. Research
has shown that couples who don’t communicate on financial matters are hardly
communicating on anything else”.
“Yet that is not the direct effect of preparing your
financial statement with your spouse. It brings speed, creates trust and hope
for the future.
Some husbands for instance don’t want their wives to
know the details of their accounts. This is not helpful.  Couples should share everything and work out
their financial future together”.
(Excerpts from
the book: “THE MILLIONAIRES CAPSULES” by AYO AROWOLO. Read “Why Tithe Giving is Spiritual”
tomorrow on this blog)

Ayo Arowolo, Publisher The Millionaires’ Capsules