We all like to watch movies. It just gets so expensive sometimes, especially if you have to go for the soda and popcorn. Now I know that renting a movie and watching it at home isn’t exactly the coolest or sexiest option combined with the fact that rental prices aren’t that cheap either. I’m writing about this odd topic to let you in on a great money saving idea.

In many areas of the country there’s a company called Redbox that has DVD vending machines in MacDonald’s or some grocery stores. These DVDs are only a dollar to rent for a day (which is all the time you really need anyway right?). But here’s the kicker. Visit www.insideredbox.com and you can get promotional codes that’ll let you get the DVDs for free for the first day.

Moral of the story: Have a great night at home with a free movie. Do it for free. And bonus, you have a fridge full of food right in the next room.

So like I said before, this time we’re talking about the Income Statement. This one should be easy right? I mean, we all earn an income? Well, if it’s so simple, why do so many people have balances on credit cards that they can’t pay off? (Now don’t get all up in arms about all fancy manipulations you do with credit that’s “fiscally responsible”. We’ll talk about these in a later post.)

Anyway, the income statement is a powerful tool because it tells us how much money is coming in and how much is going out. The point is to have some left over. This shouldn’t need to be said.

This financial statement is the embodiment of the old saying, “Live within your means”. Spend less than you earn. These are financial rudiments, but so many people can’t seem to put them into practice.

Now, in the last post we said that the balance sheet is a financial picture at a specific point in time which is cumulative over time. This is in contrast to the income statement which provides results over a specific amount of time. Normally you’ll have a statement for an entire year or for single months.

To put an income statement together we need to list all our sources of income. For most people this consists of your paycheck. This can also include any dividends paid from stocks and interest earned on bonds or savings and money market accounts. You might also have some business income or rental income from a rental property. In any event, all these added together make up your gross income.

Next, gather together all your expenses over the course of the same time period. Your mortgage/rent, car and utility payments. Expenses for groceries and entertainment are also included. Anything that you spend money on should be listed together to make up your expenses.

We’re almost done. Take your gross income and subtract all the expenses. This provides you with your net income. Businesses may also refer to this amount as retained earnings meaning exactly what it says: earnings retained for yourself after all expenses have been paid. The equation for net income can be plainly expressed as follows:

Net Income = Gross Income - Expenses

I really believe that the income statement is an important concept to master, but if you think it sounds too much like a budget (and we know how much everyone loves budgets), I’ll explain why I don’t actually prepare an income statement for myself. I do, however, keep a balance sheet. We’ll talk about this later though… Let the income statement sink in for awhile.

Financial statements are how we measure and track our financial success (or failure for that matter). You’ve got to begin to see your personal finances as a business on some level. If you work at a job, you’re selling your time to your employer. If you’re self-employed, you’re selling your services to others. This is your income. You also have expenses (think house/rent payment, groceries, gas, electric, children’s music lessons, etc…). With this basic understanding, you can now start to profitably run your “business”.

The first financial statement to talk about is what’s called the Balance Sheet. You’ve probably heard the term before, but it isn’t something that only a Wall Street analyst can figure out. For our purposes here, we’ll keep it simple. The balance sheet is a detailed representation of one simple equation:

ASSETS = LIABILITIES + (owner’s)EQUITY

In one column we’ll list all of our assets. These are our economic resources. They include such things as the cash in your checking and saving accounts, the value of any stocks and bonds, investment real estate holdings and any amounts owed to you (accounts receivable) by another party.

The other column consists of our liabilities and equity. Liabilities are all amounts owed to others. Examples of this are car loans, mortgages, credit card balances and don’t forget the money you borrowed from grandpa Jack. The equity portion of this column is what balances the sheet. Another term for this equity is ‘Net Worth”. Rearrange the preceding equation and you get:

Net Worth (equity) = Assets - Liabilities

Simple and logical. What we own minus what we owe tells us how much we’re worth (this is purely financial; I’m not discounting our intrinsic worth as human beings; I’m just leaving it for another blog).

These are the basics of the balance sheet. It’s also important, however, to understand that the balance sheet only gives you a snapshot in time of your financial picture at one instant (say December 31 of last year). Everyday, you could tabulate new figures, but that would get tedious and truthfully isn’t worth it.

Now, if you’re confused about where your job factors in and the expenses I talked about earlier, we’ll get to that next time when we talk about the Income Statement…

What do you think of when you hear someone talk about financial literacy? Take this one step further now. What would you need to know to be financially literate? How to balance a checkbook; how to pick a winning stock; an in-depth knowledge of corporate finance? Possibly.

Think of the richest person you know. This could be your boss at work. Maybe it’s your doctor or dentist. Perhaps it’s your broker or an investment banker. What makes them so rich? Or are they? How long would they be able to maintain their current standard of living if they one day decided to quit their current job or position? It’s an interesting question to ponder. How long could you survive without your job or profession?

Just because someone earns a huge paycheck doesn’t make them financially stable. I hate to break it to you, but millionaires file bankruptcy too. Prime example: M.C Hammer. So what is the common thread among the financially stable, or financially literate? We’ll continue to explore this question but let’s start with some basics.

All companies on the U.S stock exchanges must file financial statements with the SEC (Securities and Exchange Commission). Why do they do this? Investors need to know how healthy and financially stable a company is before investing. So what do this have to do with anything?

Next time, we’re going to talk about your personal financial statements…

I’d like to explain why it’s so important to figure out why you want to start building your wealth. Becoming wealthy takes time; in most cases it’s a life pursuit. Without a strong belief in what you’re doing, it’ll be easy to sink back into mediocrity or give up all together. There is a certain level of commitment that must be maintained. It’s two feet in or two feet out. There will be many naysayers that will very convincingly explain how you can’t succeed. You’ll also encounter extreme peer pressure to distract you from your goals. You’ll need a clear vision of what you’re trying to achieve. Well, now that we understand this point I’ll move on.