Brian Armstrong

How to Understand (and Create) a Personal Financial Statement Each Month in 5 Minutes

Creating Financial StatementsA lot of people shy away from any talk about “finance” or “accounting” because (1) its boring (2) it involves math and (3) its hard work.

Well it’s not as bad as you think. I’m going to show you how to understand financial statements in about 5 minutes. Then I’m going to give you some Excel templates to create your own. (See the video demo at the end.)

But first…

Why Should You Create A Personal Financial Statement?

If you wanted to lose weight, you’d have to weigh yourself right? If you wanted to be a great race car driver, you’d have to time your laps.

Well if you want to get rich (or become financially free), you have to create financial statements.

You are a business. You have money come in and you have money going out. You have things that you own and things that you owe.

If you don’t have a way to MEASURE progress and COMPARE what works and what doesn’t, then you are just wandering blindly in the dark.

Robert Kiyosaki talks a lot about this, how rich people are “financially literate” and how this should be taught in schools. That way we wouldn’t have so many Americans in credit card debt, losing their homes, and retiring flat broke only to become a burden on their families.

But that is another story. The thing to remember is that something MAGICAL happens when you start to measure your progress. Your success rate goes through the roof.

If you aren’t looking at your financials about once a month then you quite simply AREN’T serious about becoming rich. (You can pay a bookkeeper or accountant to do it as well if you don’t want to go through the process below.)

Understanding Financial Statements In 5 Minutes

I’ve tutored about a dozen people in MBA level finance and accounting courses. Here is the explanation that seems to work the best.

There are only two types of financial statements that you really need to know: a balance sheet and an income statement.

Example Balance Sheet BALANCE SHEET

  • Shows what you own (assets) and what you owe (liabilities)

  • The difference between these two (assets - liabilities) is your net worth.

  • Shows one particular MOMENT in time, a “snapshot” if you will.

Click the thumbnail to the right to see an example. As you can see, the money in your bank account, the market value of any property you own, your car (if you own it outright), and stocks are all examples of assets. Mortgages, car payments, credit card debt, and other loans are all liabilities. The difference is your net worth. Notice how it says a specific day in January and not just “January 2008” because a balance sheet refers to one moment in time, not a period of time like a month.

February and March haven’t been filled out yet, but if you spent a few minutes once a month putting in those numbers you can see how easy it would be to track your progress month to month.

Example Income Statement INCOME STATEMENT

  • Shows where money is coming in (income) and where money is going out (expenses)

  • The difference between these two (income - expenses) is your net income.

  • Shows what happened over a PERIOD of time, instead of how things are at one moment like a balance sheet.

Again, click the thumbnail to the right to see an example income statement. For most people the primary source of income is their job so you might have that first. After that you can see the income from those two properties listed on the balance sheet, as well as income from a small business you started, just as an example. Secondly, you see expenses broken down by category and net income at the end. I’ll show you how to quickly categorize your expenses in a minute.

Notice how in the second month your cash flow is negative and the number appears red. Negative cash flow is bad! It means you are spending more than you’re earning, and that is the way toward bankruptcy, not financial freedom. If you hadn’t made your financial statement that month would you have ever know this? Probably not.

Thats it. Not as scary as you thought right? On corporate financial statements you will sometimes see some strange terminology, but the basic concept is the same as for this personal financial statement. Balance sheet: what you own, what you owe. Income statement: what you made, what you spent.

Why Quicken and Microsoft Money Suck

Let me take a minute here and rant about how bad these two pieces of software are (in case you don’t know, they are the two most popular “personal finance” programs out there). I think part of the reason so many people are afraid of getting their financial statements together is that at some point in time they booted up one of these two programs, spent several hours or days fiddling with things, and eventually got so frustrated that they never took another look at it. At the very least the “pain” of using these programs causes people to subconsciously avoid doing their financial statements each month, and they rarely get done.

To me this is such a shame. I could literally write an entire book on each one of these programs listing all the flaws in their design. They should be used as case studies in every user interface design class in the country on how NOT to design software. People tend to make excuses for them, saying that finance is complicated, or blaming themselves. Nope, its just embarrassingly poor software design, end of story.

Is it any coincidence that an entire industry has been born of “Quicken Certified Professionals” who are basically consultants that went through enough classes to learn to use the program?

I mean, imagine if Google had designed a personal finance program. The first time I used GMail I didn’t have to attend a class or hire a certified consultant to figure out how to use it. It just worked.

No Need For Reconciliation

So ANYWAY (rant over)…how do we get around it? Well, Quicken and MS Money are centered around this idea of reconciliation, which basically means you list all the things you spent money on and earned money from and then try to match each one to a line in your bank statement. To me this is incredibly tedious, and you always find yourself in a situation where you are saying “ok I know that line on my bank statement is valid, but I don’t know how to account for it in this damn program, so its saying all my numbers are wrong”. Then you give up.

To me, reconciliation is the worst part of the whole process, and the whole point of it is to make sure that no mistakes have been made (either by the bank, or on your part). Well, I have a much easier solution to that problem: JUST SCAN YOUR BANK STATEMENT AND SEE IF ANYTHING LOOKS OUT OF PLACE.

I can do that in about 30 seconds. Sure its not as robust, and it would never work in a huge publicly traded company, but for me it works just great. I don’t need to enter my $6.50 burrito and then match it to a line on my bank statement. I know its supposed to be there so I just move on.

After all, I’m not really that concerned about the bank making mistakes or people illegally charging my card. It rarely happens, and when it does its really easy to call and tell them it was a mistake and boom the money is back in your account. They are really good about that these days. So why spend 90% of your time (on reconciliation) worrying about a rare problem that is easily fixable?

I’m far more concerned about these questions:

  • Did I make enough income to cover my expenses this month?

  • Am I continuing to grow my passive income (like from real estate), instead of relying on earned income (from a job)?

  • What am I spending money on and should I try to reduce/increase any of those areas?

  • Is my net worth increasing?

  • Am I taking on good debt (such as loans to buy houses that pay me each month) as opposed to bad debt (car payment, boats, vacation homes, etc which cost me money each month)?

Instead of using Quicken or MS Money, we going to use a program you probably already own to answer these questions: good old Excel.

How To Use Excel To Create Your Financial Statements

I’ve created a video below to show you how to create your financial statements in just a few minutes.

Here are the basic steps:

Note that for many of these steps I say “log on to such and such website” to get a statement. You can use paper statements that you get in the mail to do this, but I like to use online banking because the information is more up to date and you are guaranteed to have it all in one place instead of waiting for statements to arrive. But do it however is most convenient to you.

BALANCE SHEET

  1. Open your balance sheet template in Excel and log on to your bank website

  2. Take the account totals for each of your bank accounts and put them in the template

  3. If you own any real estate, log in to your mortgage website and see what your principal is at now. It should go down a little bit each month, reducing your liability.

  4. (Only need to do this step every 3 months or so, otherwise just copy the figure from the previous month over.) Ask your real estate agent to get the current market value of any real estate you own. This will update in the asset column. It is an estimate, you won’t know for sure until you go to sell it, which is why we don’t update it every month.

  5. Log in to your brokerage account if you own any stocks or bonds. Update the current value of your stocks in the asset column.

  6. Check the outstanding balances on any credit cards, student loans, car loans, etc that you still owe money on and update them in the liability column. Hopefully these should go down each month.

Moving on to the INCOME STATEMENT

  1. Open up your Income Sheet template in excel and log back in to your bank’s website.

  2. Download the transactions for the previous month as a CSV file (this will open in a separate Excel file)

  3. (See video for further details.) Categorize each item on the bank statement and find the totals using Data->filter->autofilter and AutoSum.

  4. Input each category of expense and income to your income statement.

Download The Excel Templates

By the way I did not make these excel templates. I have modified them, but the original templates came from the excellent Consumerism Commentary blog. They deserve all the credit.

>>>Download the Excel Balance Sheet Template<<<

>>>Download the Excel Income Statement Template<<<

Conclusion

Remember that financial statements are not scary, they are easy.

A balance sheet is just a list of what you own and what you owe at a particular moment in time. Subtract one from the other and you see your net worth. Make it grow!

An income statement is nothing more than a list of what money you earned and what money you spent over a period of time. Subtract one from the other and you see your net income. Make it grow!

And of course, as a bigger picture goal, you should be trying to get more and more assets that GENERATE INCOME (like real estate) and start businesses so that you eventually won’t have to have a job to cover your expenses each month. In other words, you should be “breaking free”.

I hope you’ve seen the importance of financial statements now. Only whats measured gets done, and if you aren’t measuring your financial health each month, then the chances of you blindly stumbling upon wealth one day are not high.

Best of luck, and if you have any questions or comments please leave them in the comment box below.

Thank you, Brian Armstrong

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