Financial Statements Rich Dad said, "The riskiest investor of all is a person who is out
of control of his or her personal financial statement. These are people
who have nothing but liabilities that they think are assets and as much
in expenses as they have in income and whose only source of income is their
Understanding your Financial Statement is the foundation for taking
control of your personal finances. Rich Dad believes the relationship between
the Income Statement and the Balance Sheet is everything. What is the
first step to financial freedom? Take control of your Financial Statement.
Cash Flow Pattern of the Poor (or a young person
still living at home): The poor spend every penny they make and they have
no assets and only liabilities. The cash flow is limited to income and
expenses and the cash flow pattern of the poor reflects income from a job
that is used to pay expenses like rent, food, clothes, transportation and
Cash Flow Pattern of the Middle Class: Individuals
in the middle class accumulated more debt as they become more successful.
A pay raise qualifies them to borrow more money from the bank so they can
buy personal items like bigger cars, vacation homes, boats and motor homes. Their wage income comes in and is spent on current expenses and then
on paying off this personal debt. As their income increases, so does their
personal debt. This is what we call the Rat Race.
Cash Flow Pattern of the Rich: The rich have their
assets work for them. They have gained control over their expenses and
focus on acquiring or building assets. Their businesses pay most of their
expenses and they have few, if any, personal liabilities.
An individual's cash flow pattern may show a combination of these three
types. Which pattern does your financial statement reflect? What story
does your financial statement tell? Are you in control of your expenses?