0:12 good afternoon and welcome to people making money one with the way to our shows I'm your host Kevin bemel and we're here every Wednesday at 12:30 pm Pacific uh 3:30 pm. Eastern to talk about professional success and wealth building um and uh typically those two uh go together um unless you know we were born with the proverbial Silver Spoon um I know I wasn't and I suspect you were not either um in any event um today this is this ends up being this is
0:48 today's show is going to end up being kind of an extension of a topic that was raised by my guest on Monday's show trust and Estates weekly Von Marie Thomas who an accountant one of her Specialties is trust and Estates which is why she was on that show and she was talking about uh financial statements um and because they really are the basis for understanding our finances so we can't do financial planning really we can't do estate planning without having some sense of our financial position and
1:26 the way we do that is by or is through financial statements and so uh we're going to spend uh today or Today's Show talking about the two basic financial statements uh one of them is the income statement or sometimes called the income and expense statement um and and that we're going to be looking at them I I should um say from a personal standpoint so there are financial statements for businesses um and and there are personal financial statements so we're going to
2:01 be looking at the latter um and and like I said the first one we're going to look at is the income statement or the income and expense statement for for a business that's oftentimes called a profit and loss statement or a p&l statement um we usually don't look at ourselves as sort of profit making entities in that sense so I'm going to be calling it an income statement or an income and expense statement and then the other one is a balance sheet and a balance sheet so the difference between the two is an income statement
2:36 is show is showing how our cash flow is going our income coming in our expenses going out um at the end of the period typically either monthly or annually is there anything left okay um and and so are we cash flow positive or are we cash flow negative um so it's so the income statement is is showing our financial position over a period of time okay a balance sheet is showing our financial position as of a specific date and time
3:14 and it's looking at our what are called assets those are the things of value that we own liabilities those are debts that we owe generally speaking and then the balance between assets or the balance after you subtract liabilities from asss is something called net worth so net worth is really what we own if you will or it's the value of what we owe own actually should the value of what we own so let's say you know we buy a car and the car costs $50,000 and we borrow $40,000 to buy the
3:50 car so $50,000 minus $4,000 leaves $10,000 presumably that was the down payment we made okay so at least the moment that we bought the car the car has a net worth or what's sometimes called an equity value of $10,000 right it's the car doesn't represent a a a a value of $50,000 to us because we owe that $4,000 in the car loan right so we're going to be looking at these two and they're going to help us understand what our financial positions are so I'm going
4:26 to go ahead and and uh share my screen okay here we go all right and all right so what we're going to look at first as I mentioned is a um an income statement an income statement or in this case it's a monthly income and expense statement now by the way we could I could have done a second column here and multiplied everything by 12 and made it a a monthly and annual income expense statement there 's many different ways you see
5:01 these and depending on what its purpose is um you know it it may be monthly it may be annual it may be both um for most of us we tend to look at our finances in terms of um cash flow on a monthly basis and so that's why um I'm looking at this on a monthly basis so um excuse me um you know I I I don't know if this is you know typical in that sense but I'm I'm making it a two income household
5:36 okay um you know they may or may not have a child or two um you know it doesn't really matter the categories for the most part stay the same um but but in you know while the general categories are are just that General they're the same you know your situation may require certain specific other categories um and and so you know you would add those in or take those out as as necessary I've just done this in a very simple um Excel spreadsheet now there are um uh sort of
6:11 bookkeeping programs if you will that will automatically generate financial statements I know for myself I use quickin um quickin is very easy to use uh you know full disclosure I I don't own any stock in into it which I think is the company that owns quickin um as far as I know maybe in a you know in a mutual fund somewhere or something but I get nothing for you know talking about quickin at all um it's just it is the software that I've used for for decades now um for a while I used QuickBooks um and and I I QuickBooks is much more
6:48 complicated to use for personal finances I don't think we you know we need something that complicated I suspect now there are apps on your phone that that you know will track things similar the way Quicken does um but you know one of my good friends he just uses an Excel spreadsheet like this so you know whatever works I mean I think the main thing is we don't want to spend a lot of time doing this and so whatever method you choose should be the one that you can use most efficiently okay because if it takes a lot of time to do it you're
7:23 probably not going to um and so then that negates the value of of having uh financial statements okay so looking at the monthly income and expense statement all these figures here in column B are are monthly okay so we start out with with income okay and um the nice thing about Excel is you can do calculations in it so in this case um salary earner number one has an annual salary of 85,000
8:00 which works out to about 7 $7,100 a month uh salary earner number two is making $70,000 a year which works out to about $5,800 a month okay and then you'll see when we go into the balance sheet um that there are some interest bearing accounts so they're throwing off about $26 a month in interest so all told this uh this couple is earning just under $113,000 a month okay so um just you know to do an exercise here we can
8:37 annualize this star 12 okay so they're making about $150,000 a year between the two of them okay um and that that's you know that that's a pretty nice income uh for sure all right now sometimes you will see uh like if you find a you know an income statement template they'll just say you know like paycheck number one like what what what is your paycheck I don't recommend doing it that way because we're leaving out a whole section of our financial life and
9:12 that is the taxes that we pay okay so your take-home pay right that paycheck it's probably not in the form of a check anymore right it's probably being deposited directly into your checking account um but in any event the money that's being deposited in your account has already had payroll taxes subtracted from it okay so if you're making a salary of $85,000 a year or about 7,100 a month you're not getting $7,100 a month deposited into your account if you're an employee your your employer is
9:48 required to make payroll tax deductions that are then sent to the federal government um to basically to make sure that you you pay your taxes so um in most cases you're going to be paying um in payroll taxes Social Security and Medicare oftentimes those are combined into something called FICA fiaa which stands for federal Insurance contribution act so that's the law that requires these deductions and as I
10:25 recall social this deduction for Social Security is 7.65% for the employee um and then the employer matches that and um Medicare is I think 2.9% of memory serves the these may have changed recently but they're around that amount and again the employer matches that contribution okay by the way if you were self-employed so let's say you had your own business okay and let's say your own business generated income to you of about about $85,000 a year um in your
11:02 payroll taxes since you're self-employed um and this is this is by the way your self-employed meaning um in this case that that you are a sole proprietor your business is not a separate entity like an LLC or a corporation um so if you were if you were a sole proprietorship these amounts are going to be doubled because you're going to have to pay what's called self-employment tax which is BAS basically the employer and the employees share of Social Security and Medicare okay so in this case though we're looking at a situation where you're you
11:39 know the the salary earner is an employee and so the employer is paying half all right and then you're going to have a deduction for federal income taxes okay and then you're going to have a deduction for well some states will have a deduction for state income taxes and um I'm going to close stop sharing this for just a moment because I want to show you um a website that I found okay this is um ADP is a um uh um a payroll uh company okay and
12:16 they they have a salary paycheck calculator tool that you can use okay and in this case you can plug in how often you're getting paid in this case semi-monthly twice a month here's in this case the $70,000 a year no overtime okay and then it tells you what the deductions are so if you're in a state um in this case I plugged in Georgia so so Georgia has a state income tax um and this would be the this would be the income tax deduction for each pay period so it's going to be twice that for the
12:51 monthly deduction now if we were to change this to to the next door State uh Florida okay notice there's no state income tax deduction and that's because Florida does not have um a state income tax so you wouldn't have that um you wouldn't have that as a factor and you can see here in this little graph your take-home pay is you know over 75% of your salary whereas if we go back to Georgia here okay notice that now take-home pay is just slightly over 75% but it's a smaller percentage because of
13:28 this income tax deduction okay and the nice thing about this is oh this well okay there there you go um you can you can um you can put your filing status you can put you know the number of personal allowances you have if you have dependence if you have going to take additional allowances additional withholding all of that you can plug in here okay it also gives you you know things about um uh benefit benefits medical dental vision healthare uh savings accounts and that kind of stuff
14:03 so so this is a really nice tool um I'll put a link to this um in the show notes um so that you can check this out um if you want to um after the show so I just like said I just want to show you that so you can see these the kind of tools that are available to to do these kind of uh these kind of things okay so now going back to um our financial statement okay so here's the deductions you know for salary earner one these first four and then salary earner two who's um a
14:38 little bit who's making uh 70,000 a year so you can see the deductions are are smaller because the person isn't making as much money okay so in total there is about $3,200 in deductions okay against total gross income of about 1,000 so um you know a little bit a little bit less than 25% okay and and again that's because um we're assuming they live in a state like Georgia that has a state income tax so their net income that's income after
15:15 payroll tax deduction is $9,700 little over that now by the way you might have other types of payroll deductions besides taxes so if you're if you're um employer has a 401k plan and and and you have a like a matching option so that may be deducted from your gross salary um and so that that's not a payroll tax deduction but that is a payroll deduction okay and so again that would lower this this number okay the idea is
15:50 is to figure out you know what am I really you know taking home each month because this is what I have to spend and monthly um in order to support um my lifestyle let's get rid of this okay now so that's the income side and by the way the income side could be much more complex so maybe you own a rental property okay and you're getting rent on that property well um you know you want to be careful because you could
16:25 plug the rental income up here okay but if you don't then uh plug in the expenses from operating that property down here you're getting a false picture so in a situation like that what I recommend doing is do a separate income and ex a separate income statement or income and expense statement for the rental property and then you can um plug in the net rental income so you know let's we can do this real quickly here let's we could just put in here you know net rental income okay and let's say
17:03 it's uh 1,25 a month okay so in that case now um you when you get down here you can see your n income is higher but you don't have to worry about this being um inflated because the expenses were not deducted they are okay now um expenses of owning a rental property like if you own a house let's say um and you rent out so you're still going to have to pay the property taxes you're going to have to pay insurance um you may have some maintenance costs okay now of course the property taxes generally speaking are
17:38 paid in one or two installments not monthly so you'll have to you know divide the cost of the property taxes by 12 in order to get to a monthly net rental income okay recognizing that that that's kind of an average of your your monthly income okay and and uh so this isn't truly going to be what you take home every month okay but that's all right um you know it's it it's if it varies you know a couple hundred dollars a month or something like that that's not a big deal what you want to avoid are big swings five six six 700 a month
18:14 or more okay all right so I took the rental property out because as when we look at the balance sheet you'll see they have no rental property all right so we have a net income like I said of a a a little over $9,700 okay now we're going to look at the expense expenses okay and again these are typical expenses so um groceries and restaurants I I mean I I didn't I just plugged in $1,250 a month it's about about $300 a week um you know here in Los Angeles that that probably isn't
18:49 enough maybe it's not enough in other places because you know we've had some some inflation in flu food prices and and restaurants have have had big price increases as well but anyway um utilities so you know depending on your living situation now you'll notice here there's a mortgage payment okay so this couple owns their own home whether it's a single family residence or a condo whatever it is they own their own home so utilities are are going to include electricity uh water sewer if there if
19:25 they have natural gas maybe for heating or for C that'll be included okay so those are the typical utilities that they pay and again if this were Los Angeles this is this is frankly way too low um but in any event that's what's included in utilities um you know it used to be you might include telephone but I don't think almost nobody has a landline anymore so uh telephone probably isn't a typical utility um anymore all right then internet service okay all you know vast well I think what 75 80% of Americans have internet
20:02 service Wi-Fi if you will okay um around $100 a month okay um you know some people have it with cable although fewer and fewer people have cable and you see um I have streaming services here not not cable because I think it's much more common that people have you know two three four streaming services whatever what you know whatever they've got okay telephone typically is cell phones these days so um and and this can vary you know you hear about services that are you know $50 a month per phone but you know close to $100 a month is Not Unusual either
20:38 okay and then I I I put in you know entertainment this could be movies plays sporting events um I you know whatever else um you know people do um you know for amusement that would be under entertainment okay and now we get into other and and and with the exception of food really kind of the more costly items so auto insurance right the the the um it's a couple they probably you or I'm assuming they both have a car okay and so there's there's two um um insurance premiums this may
21:15 actually be a little bit High um for for monthly insurance premiums although you know for California no it's maybe even be too low but at any event uh I put in $541 home insurance you know $250 a month that's that's $3,000 a year um that may be too low again for California it it it almost for sure is too low okay mortgage payment $3,500 a month um I'll explain to you um how that works out when we go to the balance sheet um and then vehicle loan payments so you see you'll see in a minute they have two
21:50 vehicle loans and then student loan payments um you know this is a couple they they already own a home so they probably you know with the kind of salaries um they're making one would imagine that they went to college although not necessarily um you know a lot of a lot of um trades pay these kind of salaries now plumbers electricians um you know those kind of things but um you know again just to give you an idea of what kind of uh expenses generally you see you know student loan payments would would certainly be in there now there may be
22:26 other ones you may have dry cleaning I I don't know um I you know these days I guess you know most people don't wear don't even dress like I do with you know shirt let alone a tie or a suit um so maybe they don't have dry cleaning or or shirts to launder um but that that could be that could be another expense um they may have uh um educational expenses if there's children um you know just even if it's just you know sort of books and supplies and that kind of stuff if the child is going to private school then you know again that that's that could be
23:01 a huge cost and here in here in you know Southern California private school can easily be a th000 to $2,000 a month or more I mean top private schools could you know can rival the cost of going to college so that could be another big expense you may have daycare expenses you may have expenses related to your pets if you've got uh your dog cat whatever food and and Veterinary Care um you know this is making an assumption too um that they've got really ex excellent medical care right because you
23:37 see no medical expenses here so presumably they don't even have a deduction or a co-pay that's probably you know unusual um these days I I would say you know probably the majority of of uh people have some kind of medical expenses even if they have employer provided health insurance um and and a lot a lot of employers don't provide dental insur dental insurance so there could be dental expenses they also don't um uh Supply vision insurance so there may be you know glasses or contact lenses um so that that's all there could
24:14 be expenses for clothing um so there's there's lots of other categories that we could add in here you know depending on the your individual lifestyle okay um but but this is this gives you an idea of you know some typical expenses that that you're gonna you know you're gonna and and um the idea would be not to estimate them the way I did but to actually look you know what what are we spending each month for groceries and restaurants what are we spending for utilities on average each month okay that is the benefit of a
24:50 of a program like quickin is it will calculate your actual expenses and in fact you could you you know for example you could look at um all of 2022 and then divide those numbers by 12 in order to get an estimate of what you think they might be you know might have been for this year um maybe adding some kind of inflation Factor 3 four five% whatever okay so um this particular couple their um uh monthly expenses are about $9700 so when all of said and done they appear to be living within their
25:26 means good for them okay so they there there's a positive balance at the end of the month okay and um and and and that's good um obviously let now let's let's just say um that uh their uh food bill is actually more like uh 1,600 a month okay and and and let's let's just drop this a little bit let's drop this to to 300 okay so in this case um they're going negative cash flow each month of almost $100 right that that's not
26:02 sustainable okay because you know that they you'll see they have some savings but um o over a 12 Monon period um if this is kind of like their average monthly so you know we're talking almost $900 almost yeah almost $900 um negative for the year and so when we look at the balance sheet you'll see that that'll eat up their savings you know pretty quickly right so um they you know they would need to to make some adjustments and that's the idea of doing this is so you can see hey you know why
26:39 do I feel like at the end of the month I'm always struggling well evidently it's because you know this this couple is spending more than they're earning right so now they can look at their situation now one solution they may have so this this particular um salary earner number one is paying um almost $111,000 a year in income taxes uh or I'm not paying with having uh withheld almost $111,000 in income taxes and salary earner number two is having withheld over $7,500 so between the two
27:16 of them 1819 about $199,500 a month are being withheld in federal income taxes so depending on their taxes situation that I.E they they've got a mortgage payment so a part of that is going to be um deductible um as interest you know I didn't put in here um that uh they have to make uh uh property tax payments but the property taxes are also deductible so it may be that they're having too much deducted in income taxes both both
27:54 per per Federal maybe as well as state okay so it may be that they need to adjust their withholding and if they do that then they won't be going negative each month and they they still are not you know they're still not going to have a whooping big tax bill you know when it comes time for them to file their tax return okay so those are the kind of things that um a welldone income statement allows us to to look at and analyze both ourselves and and if we're working with a financial advisor or we
28:30 have an accountant or whatever so you know we can sit down with our financial advisor or our accountant and they can look at some of these things and help us make some decisions so that we're on a sound financial footing okay but without this without an income statement we're really guessing what our cash flow is okay and uh and so it's it's hard to really make these decisions and more importantly stick with them okay so in especially in determining your expenses you know I recommend presumably you know
29:05 if you're paying them out of a checking account Andor you know you you you have them automatically charged in your credit card and then you pay your credit card bill at the end of the month I recommend doing this with as much detail as you can so you can really see where your money is going and then understand where um there may be you know room to to make Some Cuts if you need to on the other hand let's say that they were only spending you know $800 a month a couple hundred couple of100 a month I mean a week on food so now you know they've got a positive cash flow of $8,700 that's
29:41 terrific so you know what they might do is say hey you know what we're going to take half of this $350 and we're going to put that into an investment of some kind um and then you know what you know looking at at this we're going to add you know um another $100 for entertainment um and we're going to bump our food budget up by $50 a week oops got to put a minus there minus okay and we still have our $350 more than our $350 left um to put aside each month to build wealth okay so again
30:17 this is this is the advantage of of having a a you know a properly uh properly done income statement all right so we're we're now we're going to move from looking at our financial picture on a cash flow basis over a period of time to looking at a balance sheet okay so in this case we're doing a personal balance sheet and by the way balance sheets can be done for businesses um they're going to look you know diff somewhat different for businesses but they they do work essentially the same way okay and the thing about a balance sheet is it's done
30:53 as of a specific date in time so there's no such thing as a balance sheet for the you know month of November okay that doesn't make any sense because the value of an asset on November 1 could be different from the value of an asset on November 30th so you know which date or which date or maybe it's November 18th I mean values of assets changes in some cases every day okay as do things like loan balances not not necessarily changing every day but but they you know they can change monthly and so it depends you so you want to pin
31:30 it down to the day all right um all right and you see here then the three categories assets these are things of value that we own liabilities these are basically debts this is money we owe and then net worth is assets minus liabilities okay and by the way when you see a number with a parenthesis around it that means it's a negative number number that's a kind of a standard bookkeeping uh term I mean and it's it's easier to see than if it had just a little minus sign in front of it so that
32:07 that's why I've done it this way um and you also see here notes so it's not unusual to have a notes column in a balance sheet um if there's something um that that needs to be pointed out in order to make sense of what's going on all right so now let's go through each one of these items and understand what it is so if it's a couple uh even a married couple um not unusual for each person to have um his own or her own checking account um and savings account so um you know I'm just matching you know kind of
32:42 like person one person two throughout so um checking account presumably you know what a checking account is it's sometimes called a demand um account it's it's it's you know money Flows In and Out on a pretty you know pretty free frequent basis it's it's sort of the ready cash that you have to pay your bills as opposed to a savings account um which um is is more like kind of a maybe a rainy day fund if you will and that's earning you know some kind of Interest now these days um you know a lot of people keep their savings account in a
33:17 money market because the interest rates on money markets generally are higher than in a regular Bank savings account um and so uh but in any event the interest thrown off by these savings accounts plus these taxable in Investments here that's where we get the interest in dividends income here right that's why this that's why there's this additional income item it's because um the interest earned on savings accounts and taxable Investments is taxable hence taxable Investments
33:54 okay um so I you know I just sort of you know chose numbers um for these um the numbers could be higher a lot of this is going to be um a a lot of a checking account balance is sort of personal preference um I know for myself I like to keep at least a months um living expenses in my checking account and I like to have another month's um worth of payments in my savings account that way I just you know I don't have to worry if I can pay my bills so you by how I like my life to be um you know this is way
34:31 too low because they've got you know 97 9800 a month um and between the two of them they've only got 26 32 about 4,000 so they only have about half a month's bills you know in these two accounts but but that's okay I mean this taxable investment by the way this could be a money market fund uh as well could be a money market fund could be a mutual fund that's not in um in any kind of retirement account that's deferring the taxability okay um it could be all kinds of things um you know probably not real
35:08 estate especially since um the values are are so low um but it's probably some kind of financial investment um you know could again could be um uh an ETF an exchange traded fund um most likely it's you know something like that okay but in any event the reason it's important to note that they're taxable is just that so if it's a taxable investment so um you know this income here is going to be subject to taxation now because it's so
35:45 small relative to the the gross income number in fact it's like two10 of a percent or something like that so the the income taxes being with hell you know are probably going to cover this so you don't have to really you know worry about it um but if if the if if this number were higher let's say this number was you know $2,000 a month in in in interest in dividends so that is likely to mean that if you're only having
36:20 enough withheld from your salary um to cover the the taxes due because of the salary you receive you'll end up paying taxes on this when you file your return so you have a couple of options you can you can increase your withholdings to cover this or you can just you know write write a check when you submit your income tax return if necessary and that has to do with with your financial philosophy um you know do you want to loan the government that money which is essentially what you're doing with payroll tax deductions or you know do you want to just make sure that
36:56 you've got that money accumulated so when you need to file your tax return the money is there to make the payment that's that's up to you okay so we've got uh taxable Investments next you see there that one of them has a 401k plan this must be some kind of uh retirement plan that their employer sponsors and another one has an IRA so this is something that they're you know probably self-funding um e maybe because their employer doesn't have a retirement plan or something like that okay um next you
37:31 see a personal residence um $875,000 so um that's you know that's pretty expensive um now the reason I put it at that is they're paying um $3,500 a month in in a mortgage payment um that's $42,000 a year assuming they got the loan you know a couple of years ago that means that there's supporting a mortgage of about $700,000 okay so um if if even if they bought the house with with no money down which they probably didn't um and you
38:08 know the house is probably worth somewhere in the neighborhood of about $875,000 um it's unlikely that it went down in value although it might have but more likely over the last couple of years that it went up in value housing prices have been increasing okay so this is their you know one very substantial asset okay and then we mentioned each one of them owns a vehicle um and I just I just plugged in some numbers and you'll see in a minute I plug them in based on the fact that um you know most of us um you know are are
38:44 upside down in in terms of car payments especially if we got 100% car loan okay so um you're going to see that that's the case in a minute all right so all together they've got $990,000 in assets and you you may be thinking wow they're a Millionaire right not yet not yet okay so now let's look at liabilities these are the debts that they owe so um they've got some credit card debt just a little bit um now in my case um I Look to pay off my credit
39:19 cards at the end of each month and not carry balances um so and if and if that's typically what you do um you pay off your balances at the end of each month so you know you may not show any credit card um liabilities here um but that that's again it depends on what date you're reporting you know and how much these are so you'll notice by the way there's $33,000 in credit card liabilities um but their checking account balances together about $1,500 so it would appear that these must be small balances that they're
39:55 carrying um by the way um they would be much better off paying off these balances because of uh the the interest rates that credit card companies typically charge on carrying a balance but we'll talk about things like that in a few more minutes okay here's their mortgage like I said I assume they borrowed about $700,000 so they they've paid a little bit of that off not a whole lot um but they're so they got a mortgage balance of a little over $650,000 okay vehicle number number one I pegged at a value of about $224,000 I mean sorry the vehicle loan
40:31 number one has a balance of $24,000 about Which is higher than the value of the car again Not Unusual um vehicle loan number two the the the loan amount is about $39,000 we're even farther upside down so it sounds like you know these are not cars that you know retain their value um I I I just did that to to make a point and that is that um when you borrow when you uh right get a 100 100% car loan pretty much the moment you drive the car
41:07 off the lot um you're going to be upside down in your loan meaning the loan balance is going to be higher than the value of the car okay that's just most cars take a big depreciation hit the moment they're not brand new now um over time the loan balance will go down and the rate of the of the decline in the value of the vehicles will slow so the the decline in vehicle value tends to be Steep and then level off okay whereas the um the payoff rate of a loan tends
41:44 to be slow and then it gets steeper the longer you pay it off so so they're they're kind of they're kind of going uh well if if if if this is the loan balance um and and this is the the value so they're kind of going like this if you will um so in in any event that will eventually uh you know eventually these loans will be paid off with three year four year five year six years something like that um and then whatever those vehicles are worth um you know will will truly be an asset okay and
42:19 then finally they have school loans about $100,000 in school loans between the two of them again we mentioned that you know there our student loan payments um to be honest I don't know if that this loan payment amount correlates with $100,000 um in in student loans maybe not but but in any event um since there's a student loan payments then they there must be student loan debt so their total liabilities are about $823,000 which means their net worth or what we might call the equity they have in their lives is about 167 $7,000 so really you
42:59 know like like 177% of the value of their assets and in fact we can we can actually calculate that out let's take a look at that real fast okay and yeah there you go I was pretty much spot on there you go 177% okay so um and that's fine you know especially if this is a young couple a younger couple just starting out so over time um they're going to pay down their car loans they're going to pay down their student loans they're going to pay down their mortgage so this number is
43:35 going to decrease and hopefully these numbers are going to increase that's what we call Building Wealth okay um you know these numbers May decline a little bit but you know I mean unless the car unless they hold the cars to the point where they're really junkers you know so these May decline by 50% so between the two of them 48 maybe they're worth 24 between the two of them but if at that point the loans are paid off that's going to be a big boost to their net worth okay and hopefully the value of their home will
44:10 increase um maybe not as rapidly as it has the last few years um but hopefully it will continue to increase so maybe you know five years from now the house is worth $900,000 whereas the more morgage um uh the mortgage balance is maybe down at that point to $600,000 and so now they've got a 300,000 $300,000 in equity you know in their home alone so that will significantly increase this number okay and same with their school loans you
44:45 know eventually those will be paid off okay so again this gives us a picture of where we're at in terms of our our wealth if you will at at a given point in time okay and that's important because it helps us make certain decisions so I I mentioned um a few minutes ago we've got two credit cards it appears that these are balances so there's $3,000 in credit card balances they're probably paying somewhere between 18 and 24% interest on these credit card
45:22 balances whereas on their savings accounts it's unlikely they're getting much more than five four or five% so they're paying a net interest gap of somewhere between you know 13 maybe as much as 20% so it be it would be much smarter even though it'll use up this money or or use up uh yeah use up you know all of this money they'd be much smarter paying off balances that they're carrying um rather than holding these especially if these taxable inv Investments here are
45:57 relatively liquid meaning if they have an emergency they can get the cash they can get some cash out of these Investments without sacrificing the value of the Investments meaning if they need $2,000 they can get $2,000 out of here it won't be you know they won't have to pay a penalty so it costs them $2,500 to get $2,000 out okay now um if these are the kinds of Investments where they have to sacrifice some value over and above their cash needs so then maybe that would justify
46:32 continuing to carry these so they do have at least some liquid funds okay but if that were the case let's go back here remember we were saying they were looking at their overall picture in there they've got you know um in this case over $400 a month in in in sort of free cash flow so the smart thing to do then would be to take that $400 a month and over the next roughly seven months seven and a half months pay this off before they start saving the additional $400 or $350 a month get rid of this credit card debt because the reality is
47:08 there's there's really no place where they can invest this money and get an interest and get a return on it an interest rate or dividends or whatever that's going to come close to the interest they're having to pay on on carrying credit card balances okay so those are some of the tradeoffs that you know we can examine again when we've got this overall picture of of our um financial worth okay and then we can also look at other things so you know so far they've got about
47:44 $40,000 uh saved towards um retirement okay they've they've own a house eventually you know although most people don't do this um let's say you know they bought bought the house three years ago on a 30-year mortgage 27 years from now um the mortgage will be paid off and who knows what the house will be worth maybe you know a million dollars million two who knows but now they've got a place where they can live mortgage free so all they need to pay are property taxes insurance and maintenance and assuming
48:20 they've kept the house up over the years you know they've got maybe some routine maintenance with an occasional big Main item but certainly um that's probably going to be you know less than you know $3,500 a month okay so um that plays into what they need for retirement okay so then they'll keep building this up so that they've got money to pay for you know these these these expenses let's see like from here from the 250 up so this is what they need to replace place
48:56 in a retirement income because the mortgage is paid off the vehicle loans are paid off the student loan payments are paid off so notice if we were to if they were to pay off these three 35 46 56 64 so they'll pay off 2third of their monthly expenses and so to maintain their lifestyle they only need about $2500 to $3,000 a month okay now you might say well wait they're ired so they're going to want to travel of course of course okay but so maybe instead of needing you know $9,000
49:32 $9,300 a month um maybe they only need you know $6,000 a month to live the lifestyle they want so then these retirement accounts need to build up to the point where they can generate um $6,000 a month okay um and and that can all be figured out it's one of the reasons why you you know you want to have an astute financial advisor they can help you figure out these kinds of things okay um all right and let's see is there anything else I want to mention no so that's so that's that's really it in terms of financial statements so just
50:09 just to review you know again real quickly um an income statement is looking at income inflows over a period of time in this case monthly it's looking at outflows we call them expenses to figure out what is our balance each month is it positive in case in that case we have a positive cash flow or a negative cash flow and again it's over a period of time could be monthly could be um annually those would be the two most common okay a balance sheet is sometimes you'll see a another type of financial statement
50:44 called a statement of financial position that's essentially a balance sheet it's a fancy way of saying that okay and this is a financial snapshot of our life on a part as of a particular date and time it looks at our assets those are the things of value that we have it looks at liabilities these are debts that we have things that we owe to creditors other people whatever and that and what's left the difference between the two is our net worth now um let me show you one more thing before we we close let's say
51:23 that um each one of these people have really massive credit card debts okay such that their total liabilities are over a million dollars okay notice their net worth now is negative roughly $30,000 okay that means if they sold all of their assets or liquidated all of their assets and they were able to get $990,000 they still would not be able to pay off
51:59 all their debts okay now that doesn't mean that they're bankrupt okay bankruptcy is a legal process okay but let's say that both of them lost their jobs and now they have no in their income goes to zero okay well they still have all these expenses the mortgage they're mortgage lenders going to expect to be paid the vehicle lenders expect to be paid the student loan they may they may um qualify for uh you know a deferral you
52:35 know they may they may have they may get no entertainment they may have to cancel their streaming services they probably need their cell phone and internet if they're job hunting they're going to have to pay for utilities they still have to pay for food right so and let's say they struggle probably not in today's market of course job market but but let's say the job market were was really bad and they struggle for a long period of time at some point they may have to file for bankruptcy and at that point you know their creditors um might have to take a little bit of a haircut meaning they won't quite get all the money that they're
53:11 owed okay so the the mortgage lender they're going to get what they're owed um the vehicle lenders they're going to repossess the vehicles um the student loan um you know that that has to be settled the bankruptcy as do the credit cards so you know we'll we'll probably what would happen is they'll come out of um bankruptcy owing nothing so this this negative net worth is probably not going to follow them it may you know obviously I'm just talking generally it would depend on on the person's um exact
53:47 situation I'm not giving any legal advice or anything like that um but the idea for of bankruptcy is that when you owe more than you have in assets bankruptcy gives you a clean start so hopefully this negative net worth or the debts equal to this negative net worth would be what's called discharged in bankruptcy and you know they start over again and and unfortunately sometimes that's what we have to do okay well that is today's shows Today's show today's shows Today's Show
54:24 on finan statements the two basic personal financial statements so I I I hope you found this useful because again as we deal as we deal with our professional success and and and by the way this is not to suggest that the only measure of professional success is financial I I don't believe that I think there are several measures of financial success having said that I do believe that Financial success is a significant part of professional success now for
55:00 younger people uh many of them don't value financial success over other um uh aspects of professional success so you know look we each have to make that that decision on our own nonetheless we have to have money to live okay and we have to make decisions about what is our lifestyle going to be and can we afford our lifestyle right so that's why doing um an income statement is is so important so we can figure that
55:35 out and and hopefully live within our means and then if assuming wealth building is important to you and I imagine it is because you're watching the show right so the uh the balance sheet is really what tells us how much progress we're making in terms of Building Wealth okay and and and that's how we determine are we getting closer to our objective are you know we losing ground and and it will fluctuate over time the value of assets changes you know look at the stock market right it goes up one day down the next up for a week down for two
56:12 weeks whatever okay so all of that can be taken into account okay we don't we don't need to be doing these financial statements every day certainly not once a month is is absolutely adequate in some cases maybe we only need to do them once a quarter okay if if our you know situation doesn't really change that much okay but to the extent that we have important financial goals these are the tools uh for for tracking them so we know where we're at so that is today's
56:47 show I thank you for joining me um if you would like um a copy of these um Financial statements um to kind of play with on your own um by all means send me um an email or or just you know post something on social media well actually don't post on social media because I don't want you to post your uh contact information on social media but you can you can send me a direct message on social media um and and and I will uh you I can send it to you through there um and help you get started if you have
57:22 any other questions comments again always feel free to um drop those in in social media happy to answer those you can also uh email me if it's if it's something kind of private um you know by by all means uh you know of course I'll keep it confidential so thanks very much that's our this is our final show for this week so next week on Monday at 10:00 a.m. Pacific time will be the next edition of trusts and Estates weekly on Tuesday at 11:00 a.m. Pacific time the next edition
57:58 of business lessons from the military and then seven days from today at 12:30 pm Wednesday of next week will be the next edition of people making money so I thank you very much for joining me wishing you a wonderful rest of the day and and the week and a restorative weekend and signing off Marie you are my bell all the best folks