Income Statement

Hey everybody, Ron Phillips here. Today we're going to go over financial statements. And this is step one. Now listen, typically when I saw financial statements people have the reaction that I did when I was in college and you tune out. Please don't do that, this is incredibly important. It's actually critical to your success. I don't know any millionaire that doesn't understand financial statements and doesn't use financial statements. So it's really important that you understand what we're going to talk about today and in the next video. So this is step one. What I want you to do is I want you to print out two copies of this. This is called the income statement, OK? And this is the first one, so why don't you print out two copies of this. The first one we're going to go through this and we're going to put actual numbers in so that you know exactly where you stand with respect to a few numbers we're going to talk about on the income statement today, OK? And then the second one, is because some of you, for some of you this is going to be a great experience, it's going to be refreshing. For others of you it's going to be kind of painful, probably eye opening. And the second one is so that you can fix what you see in an error on the first. So it's kind of a goal sheet, and it will allow you to see on what you want to accomplish. And so let's dive into this. And what this is going to do is it's going to allow you to see a lot of really important numbers. First off, it's going to let you see how you're doing on a monthly basis. And second it's going to allow you to see your debt to income ratio, which I'll explain in just a minute, and also it's gonna help you put together a goal for your net worth, for how much money you need to accumulate before you retire. So those are our goals from this one financial document, alright? So the first thing is, you can see there's a column here called income, alright? What we're going to do is we're going to list all of the income that you have. On this example you can see that we have a husband and a wife, they're both working, one of them makes $65,000, one of them makes $35,000. You can also see that they don't own any income properties, OK, so there's a zero there. If you do, if you own rental properties, not only will you put your income from your jobs here but you're also going to put your income from your rental properties here. Any other income you get, child support, alimony, dividend income from stocks, any kind of income you get should go into this column. Then you want to total that up, and if you've done this on an annual basis then you're going to want to divide by 12 to get a monthly number, if you’ve done it on a monthly basis then we'd multiply it by 12 and get an annual number. OK? So we have both of those figures. These people make $100,000 a year and it's about $8,300 a month, OK? Next we're going to start to list our expenses. And we're not going to list all of the expenses, all we're going to do is we're going to look at debt expenses, OK? Now there's an accountant out there somewhere watching this going "this is not complete." I realize that, this is a simplified version, OK? So what we're going to do is we're only include debt expenses OK? So you can see here we have a house payment. And we're going to put our monthly payments on here, OK? We're not going to put how much we owe on our house, or how much we owe on credit cards or cars, we're going to put up here how much our monthly payment is, OK? So monthly payment if you have a second mortgage you're going to put that up here, if you have a home equity line of credit, anything that's a debt expense, OK? Then you're going to put your credit cards and your car payment, you can list all your credit cards out if you want to or you can put them all into one, don't put your balances up here we're going to use your balances in the next video. OK? We want to just put your payments and then add all these up, OK? So we have our monthly income and then we have our monthly expenses. OK? Now we're going to be able to use that information for a couple of different things. The first one is our debt to income ratio. That's a number that banks use to determine whether or not you're a good credit risk for them to be able to issue a loan. OK? And it's very simple to figure this out. All you do is you take your expenses and you divide by your income, OK? So if it's monthly you're going to divide monthly by monthly, OK? So in this case it's $1,850 by $8,300. When you do that you're gonna get a percentage. You're gonna get a decimal point, and then you're going to get a couple of numbers, OK? And in this case, the decimal point is 2.2 percent. OK? .22 and the numbers were low so we rounded down. So .22 or 22 percent, OK? And that's a pretty healthy number, that means that 22 percent of your money is going out to debt expenses, OK? So it's your debt to income ratio. Alright? Now a healthy one is under 25%, so this is a healthy ratio. Um, you can get a loan up to I think, they change it all the time, but I think it's somewhere around 40%. You may be able to go a little bit higher than that if you're getting a loan for your own home. But for income producing properties, I think they want it to be under 40%. 35 to 40%, OK? The next number we're going to figure is your net worth goal. And this is a really important number, because this is where we're gonna try to get, alright, with all of our goals. With all of the things we do to hit our goals. Alright? And so in the financial world a lot of industry experts will use the number 4% to be able to generate a good, realistic net worth goal. Alright? And the reason they use that is because if you have a number, let's use $2.5 million, if you have $2.5 million set aside, that big of an amount of money you can almost always get 4% on your money in something that's pretty safe. OK? And so we use that, what we do, in order to figure out what the big number is, what you do is you take your annual income and you divide that by 4%. So you don't multiply it by 4%, you divide it by 4%. When you do that, in this case you get $2.5 million. That means if you have $2.5 million and you're getting 4% interest on that money, then it's gonna churn out $100,000 every single year for the rest of your life, and you're still going to have $2.5 million. Alright? And so that is a fantastic goal for us if we wanna earn $100,000 for the rest of time, if we have $2.5 million we can do that, OK? And so that's our goal. And we're going to use this in the next video when we talk about our balance sheet as well. OK? So really really important if you didn't follow through this just start the video over again, fill your information in, this is really really important. Again, every millionaire I know does this. He knows it on his business, they know it on their personal, and any business or anything they're going to purchase they use these financial documents. You've got to know these, this is a fantastic starting point. Listen, the reason this is step one is because we can't put together a plan to get from point A to point B if we don't even know where we're starting. Alright? And so this is really really important. Don't skip this step, do it. And then once you've done it, make your goal sheet as well, that goal sheet is really important. It shows you where you want to be. OK? And it shows us where you want to be so we can help you get there. The next video is gonna be the second part of the financial statement, and we're going to use some of these numbers that we've, especially this goal number right here when we go to that to that next video. So make sure you complete this one. I'll see you in the next video. And listen, if at any point you have any trouble with this, or you don't understand something, just give our office a call, we'll help walk you through it, and we'll get you to the next step. See you in the next video.