Written by Kodie Axelsen
Everyone has their own challenges and their own experiences that can steer their finances in one direction or another. There may be a break down in relationship equating to a split of assets
and liabilities. There may be a death in a family that may reduce its income from two streams down to one. In my field there are no two identical situations between one person and another. Because of this, I
believe everyone should gain a foundation of financial knowledge that they can call on when making a that will impact their future finances.
I gained the foundation of my money knowledge when I was 16 from reading one of the most influential finance books “Rich Dad, Poor Dad” by Robert Kiyosaki.
I recommend everyone read this book to gather a better understanding of the foundation of your finances and your mindset around money. When you do not have a basic understanding of your cashflow or asset position it can be difficult to know what way to turn when faced with a financial challenge.
There are two main players in the finance game: profit and loss and balance sheet. Most will think this only applies to business, but it most certainly can be applied to personal finances. In the same way cashflow (or a lack of it) can break a business it can also break your personal finances. Your incomings and outgoings in a report is called your profit and loss. A personal P&L is essentially your budget.
While a budget is more so a plan, a profit and loss is an actual report of money that has come in and gone out. The amount left over is classed as your surplus funds.
If you have no money left over after expenses, then you are running your profit and loss into a negative position.
This is a big red flag.
It means you are spending more money than you are earning. This is very dangerous territory because you do not have an asset attached the debt that you could potentially sell to pay off, so the only way to get out of it is to spend years paying it down. If you continue to live outside your means you will get further and further into debt and chances are you will refinance that personal loan over a longer term to reduce its repayments and continue the lifestyle you cannot afford.
Let me be clear that this is increasing the total end cost of that once small loan to be a huge dent in your financial position.
Refinancing personal loans should not be done without speaking to a reputable finance professional so they can give you the right advice.
Your balance sheet is a report based on your assets; cash, property, shares etc. and liabilities; home loans, credit cards, personal loans etc. The figure at the bottom of this report states your NET asset position. As stated above, people with negative cashflow will generally deteriorate their NET asset position as they are going into debt without gaining an asset. There are such things as good debt and bad debt. Good debt can be used to increase your asset position such as an investment home loan where you
use the debt to gain yourself an asset and therefore increase your NET asset position.
This is the general indicator of your wealth.
Over time as you purchase assets and reduce your debt you increase your NET asset position which increases your wealth and forms part of your retirement strategy.
End game… Use good debt to buy assets that generate income. More income allows you to buy more assets which in turn increases your asset position and your overall wealth. BOOM! Hello financial
I hope this small amount of information leads you to gain more knowledge on how to build your financial position. After all, no one wants to have to work for the rest of their lives. There is no better time
than today to start to gain knowledge and think about how you want to your life to be and how you plan to get there. This is a very general explanation of how a report of your financial position works but I hope
you can use this is a basis to further your knowledge.
Be the Hero of your own Wealth! I guarantee once the light bulb goes off, you will never look back. Happy investing guys and remember if you ever have a question around finances please don’t ever hesitate to give me a call!