Pt. 1 - LET'S GET GOOD AT THE BASICS (The Balance Sheet)

(I apologize upfront for this being long & probably boring... But if you grasp the concept you will gain wealth)

I have an accounting degree, but a lot of my practical knowledge was gained by working with a Chartered Accountant from the UK. He taught me a very interesting perspective, American Managers forget a simple accounting concept called “Going Concern” which is a Balance Sheet approach, and they are overly concerned with P&L (Income Statement / Budget) analysis. I observed this when I worked for a French company and in the quarterly finance meetings the French Managers would ask a balance sheet question which US managers would give a P&L answer and the French would rip them a new one, by asking a completely new litany of questions. The Balance Sheet (& Going Concern) ask "Can I keep the Doors Open," the P&L ask can I keep the Lights On... What good is it to keep the lights on if you don't have a building to keep them on in???

Many of you have taken business & accounting classes at some point in your career, and these classes tout the benefits of leadership and knowledge or how to effectively manager (ROI) Return On Investment & Expenses. This approach leads common folk to believe that no worthy correlation between this knowledge can be achieved. This could not be further from the truth. The analysis of a Balance Sheet / Income Statement is the same regardless of how many commas are involved. We can get good at the basics by understanding what information these two forms of financial data convey. I will keep my explanations insanely simple so that the masses may understand.

Balance Sheet

The balance sheet shows a long term view of your financial status at a point in time. It communicates the basic financial formula.

Assets = Liabilities + Equity

Thoughts are things & words have power… What is an Asset, Liability, and Equity?

• An Asset is anything that puts money in your pocket (over the long term).
• A Liability is anything that takes money out of your pocket (over the long term).
• Equity is how much that goes in your pocket, stays in your pocket.

ASSETS – An Asset is anything that puts money in your pocket (over the long term).

Statistics show the inequality…Assets create opportunity, assets give you leverage power:

• 1% or less of us have 1mill net worth
• Less than 25 % of us have $25,000 in assets
• 4.3 million of us versus 381 million of them have an IRA or KEOGH.
• 2.92 million of us versus 592 million of them Stocks and mutual funds.

I am sure that you have heard, “The key to wealth is to build assets…” I would like to add, “The key to building wealth is to build strong assets without incurring offsetting liabilities, thereby increasing your equity.” So, the obvious question is “What are Strong Assets?”

Simple listing of “Strong (Financial) Assets”

• Houses – owned free & clear
• Income Producing Stocks, Bonds, Mutual Funds
• Income Producing Annuities, 401k,
• Income Producing Businesses

Simple listing of “Strong (Non-Financial) Assets”

• Education
• Spirituality
• Children

Utilized properly the listing of Strong Non-Financial Assets can yield financial success. Notice, I did not include in either listing:

• Automobiles – Unless it is an antique this is a depreciating asset & typically are acquired in a manner that increase liabilities (auto loan) or leased and therefore do not increase equity. Sam Walton one of the richest men in the world drove an old pickup. Warren Buffet one of the richest men in the world drives a Lincoln town car... Jay-Z by his own admission in an interview doesn't drive at all.
  
• Vacation Time Shares – This is equivalent to a long term lease. Most persons are told “Build Equity… Buy a home… Stop Making Your Landlord Rich, etc.” If home ownership is valued as the “American Dream” why is Leasing your Vacation monthly smart… answer: “It’s Not”
• Stock Options – these are normally issued by corporations as a feel good tactic because they make employees feel as though they own a something. They are also issued when the “strike price” (the price where you will make money by exercising the option) is nowhere near the actual stock price. The transactions work like this (this can be one step or multiple steps):
• The stock has to be trading higher than the “strike price”
  e.g. Stock trading at $15 the strike price is $10
• Individual “Exercises” the option (This is where ownership is achieved)
  eg. Purchases the stock for $10
• Individual sales the stock for $15 and pockets $5 (this is where ownership is lost)
  Preface – I have heard of the millionaire janitor/secretary, as everyone else has, that became that way by taking options in the company as opposed to salary and bonus increases. The majority of persons hold options “Ever” (in other words… so long the “For” gets dropped)

Liabilities - A Liability is anything that takes money out of your pocket (over the long term).

Financial Liabilities are killing our communities. The common thought is to “Get It anyway you can…”

Wealth Killing Liabilities

• Car Loan
• Title Pawn
• Rim Rental
• Credit Cards
• Mortgages
• Student Loans
• Payday Lenders
• Furniture Financing

I know… I know… your mind immediately jumped to the question of “How do I get a car, home, education, or any of the things I want without a loan?” Here’s a novel idea…PUT MONEY TO THE SIDE & SAVE!!! How can you build wealth if you spend or owe every dollar you get your hands on to someone else? Answer… you can’t.

I owe… I owe so off to work I go is the mantra of the poor & liability burdened. Many a New York Times Bestseller have led us to believe that the lies are the truth and the gospel is a lie when it comes to money and finance. As Big Momma says… “The Devil is a Lie…” We need to be sober, conscience, & aware of the traps:

• 90 days is not the same as Cash, Cash is the Same as Cash.
• (OPM) Other Peoples Money is not how the rich get rich
• 0% credit cards contain a back end Gotch in the fine print… That’s how the Bank makes money.

Equity – Equity is how much that goes in your pocket, stays in your pocket.

Equity is Ownership and We have little or no Real Equity in our community… outlined in the following statistics:

· 87% of the wealth is owned by Someone else

o When our babies are born into this world they will never gain more than 13% of the wealth

· Business Equity – Less that 10% of us have equity in businesses

o 3500% More of others have equity in businesses

§ 10.4 million of us vs. 789 million

The balance sheet tells us that if we have a loan against our assets we only own a proportional share in the asset. I am describing 100% ownership (Free & Clear). In the past I have sat with many clients (most look like me…) and they have Negative equity positions. Even though from the outside looking in they have the large house, flashy car, finest cloths, & kids in private school. Unfortunately, most of our people look like this or worse:

Asset			Liability
Cash (in Bank)	200.00		Mortgage	247,000.00
House	250,000.00		Auto Loan	30,000.00
Car	35,000.00		Furniture Loan	9,000.00
Furniture	8,000.00		Credit Card	8,500.00
Total Assets	293,200.00		Total Liabilities	294,500.00
			Equity	(1,300.00)
Total	293,200.00		Total	293,200.00

Lets get good at knowing & implementing the Balance Sheet Formula...
Assets = Liabilities + Equity

Pt. 2 – Stop Looking for a Program