Why Most People Struggle With Money
The path most people take in life is that of going to school to get a good education, finding a good
job and then working hard and saving money. Take a moment to reflect on what advice your parents gave you and ask yourself : If this formula is so good then why is it that so many people are not financially free? I went to school with people who were “A grade” students and now many of them are either unemployed or work for the government and can’t even paytheir bills.
In this book Rich Dad Poor Dad, Robert Kiyosaki explains: when we were in school, we got a report card every term. A financial statement is your report card once you leave school. The problem is that since most people have not been trained to read financial statements or how to keep a personal financial statement, they have no idea how they are doing once they leave school. Many people have failing marks on their personal financial statements but think they are doing well because they have a high paying job, a big house and a prestige car.
THE DIFERRENCE BETWEEN ASSETS & LIABILITIES
Kiyosaki explains that to understand how a personal financial statement works, you must know the difference between an asset and a liability.
An asset puts money IN your pocket. For example, business profits, dividends for shares and rental income. A liability takes money OUT of your pocket. For example, your family home, a luxury car, a holiday home, credit card debt, personal loans etc.
“Most people struggle financially because they don’t know the difference between assets and liabilities. Rich people buy assets and the poor and middle class buy liabilities they think are assets” Rich Dad Poor Dad by Robert Kiyosaki
While most people say they understand this principal, they don’t practice it. I see this all the time when I look at someones financial statements and see a bunch of liabilities disguised as assets. e.g. The family home.
THE PROFIT & LOSS STATEMENT
There are two types of financial statements you need to be familiar with. The first is called a Profit and Loss Statement. . It measures income and expenses. i.e. money IN and money OUT with the difference being NET PROFIT.
It looks like this:
THE BALANCE SHEET
The other type of financial statement is called a balance sheet. It measures assets less liabilities to determine a person’s net worth.
It looks like this:
WHY CASH FLOW IS IMPORTANT
The relationship between a profit and loss statement and a balance sheet is important. Assets provide you with cash flow which can be used to buy more assets. As these assets grow in value, so do does your income. When your income from assets gets to the point of replacing your salary you are then financially free. That means that you do not have to work for money because your money is working for you.
Here’s an example of someone who is financially free. Lets call her Sue.
Sue earns her income from her business by way of dividends, interest on deposits and rental income which provide her with an income without having to work. As she continues to receive more income, this enables her to buy more assets which in turn produce more passive income.
Jill does not have to work because the income she receives from her assets has replaced her income. Sue adheres the the principal of “Pay Yourself First” and continues to invest in assets rather than liabilities. Let’s contrast this with someone who doesn’t practice this principal.
Here’s an example of someone who is struggling financially. We’ll call him Bill.
Bill works hard to earn his income, which is received by way of salary or being self employed. Because he has never been educated on how to manage his money, he earns, spends on buying liabilities and then there is never anything left over to invest because he spends all his income on liabilities. i.e. mortgage, personal loans and credit cards. He’s typical of most people in the poor and middle class and is caught up in the ‘rat race’. He does not understand the difference between and asset and a liability and because of this he will continue o struggle with money. What he needs to do is "Pay himself first" by putting aside money for investing in assets before he spends money on other things.
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