I got a great question on the blog the other day about how to read financial statements (which I will definitely answer; in fact, we can do a mini-course here on Kung Fu Finance on that soon—it’s a great topic!).
But the question really got me thinking about how I originally learned to read financial statements, why they are important, all of the different types of financial statements that exist, and of course, the most important financial statement you will ever read…
One of the most important steps I took along my path to financial independence was learning how to create my own personal financial statements each month (and to figure out what they were telling me).
This was literally a quantum leap forward in my progress and I cannot recommend it highly enough!
In fact, I consider it so important that I have devoted an entire Kung Fu Finance belt level to it…
Grasshopper, it’s time to earn your Yellow Belt! I affectionately call this belt level “Creating Order from Chaos” and it is absolutely critical on your journey towards achieving your Kung Fu Finance Financial Independence Black Belt.
This is one of the most difficult belts to earn, but it is also one of the most important. It involves taking stock of where you are currently, getting automated (to free up as much of your time as possible to achieving your goals!), getting reports, and getting visual.
By the end of this belt level you will be able to create and read your ownmonthly personal financial statements and will know exactly where you stand financially (for better or for worse….hopefully for better of course, but believe me, mine were a real eye-opener the first time I created them!).
I am not kidding when I tell you that this is one of the most difficult belt-levels to achieve, but If you persevere and make it through (and you can do it, I know you can!), you will achieve a zen-like state and will enjoy a much more peaceful and happy existence!
Ahhhhhh. Doesn’t that sound good?
But first, the hard work! (You knew it was coming…) But I promise we will make it as fun as possible!
To earn your Yellow Belt you will need to do four things:
I won’t sugar-coat this for you…you most likely will not be able to knock this belt level out in one day (or even one week, unless you are superman/woman or are already extremely organized!). But with a few focused minutes a day and a little perseverance on your part, you will soon be the proud owner of a Kung Fu Finance Yellow Belt (and you will be a gigantic step closer to achieving your goals!).
Why is earning this belt so important to your financial future?
I’m glad you asked! There are 3 main reasons:
1. What Gets Measured Gets Managed
If you have ever owned a business you immediately understand the importance of this statement. You cannot possibly run a successful business without knowing your numbers—your revenue, your expenses, your sales numbers (closing ratio, pipeline, etc.), your (gasp!) returns, your inventory, and much more…the most successful businesses in the world measure, test, and track everything.
Do you think Coca-Cola knows how many bottles of coke they sold last month, which countries they sold the most bottles to, whether they sell more to restaurants or convenience stores or individuals, how much it costs them to produce a bottle of coke, etc.? Ab-so-lute-ly. You must know your numbers when you are in business or you will quickly be out of business (and out on the street!).
Likewise, it’s hard to know whether you are healthy or not without knowing your height, weight, body fat, cholesterol, blood pressure, and other significant numbers…you need to know your important “body numbers” to understand how you are doing and what you need to focus on to achieve better health. Do you have high cholesterol? High blood sugar? Low blood sugar? High blood pressure? Low blood pressure? You need to know all of these important numbers and monitor them on an ongoing basis to ensure that you remain as healthy as possible!
Your personal financial health is just as important as either example above. You must know your important numbers to understand how “healthy” you are financially and what you need to improve on. You can liken your personal financial statements to a report card…they are your “grown up” report card that shows you (and your banker, if you ever need a loan!) exactly how well you are doing and what areas you need to focus on to achieve better results.
And we all want better financial results!
2. You must know where you are starting from (in addition to knowing where you are going) to have a prayer of actually getting there
You can liken your journey to financial independence as just that: a journey. Most of us have access to a GPS system these days, whether it’s built into our car, accessed on our smart phones, or viewed online on Google Maps. And whenever you are looking for directions to your chosen destination (your vision…), you ALSO need to enter your starting point in order for the system to map you out the best possible path.
3. It will help you learn to read other (business/corporate) financial statements
As a side benefit, there is no better way to learn to read business/corporate financial statements than by creating your own financial statements. It will help you greatly in understanding what all of the various numbers really mean, and that in turn will help you make better investments.
I could go on and on, but suffice it to say, creating your own monthly financial “report card” and turning your chaos into order will make a HUGE difference in your life and will bring you a quantum leap closer to achieving your goals.
So Are You Ready to Get Started?
Great! We start tomorrow… Get ready to BRING IT!
To your financial success,
— Kung Fu Girl
P.S. The conference last weekend was AMAZING and I have TONS of new ideas to roll out here on Kung Fu Finance (and YouTube, and iTunes, and Amazon.com…) soon—stay tuned! Also I received many, many outstanding questions last week and will post our belated “QnA Friday” today…check the blog later to read if you’re interested (I won’t bombard your email twice in one day). Thank you so much for reading and for all of your great questions!!!