Applying the Knowledge
Balance Sheet vs
Congratulations, you made it through the entire course and you are now an accounting whiz! But now you might be wondering, "How do I actually use this knowledge?" I am glad you asked. To close out this course, this last lesson is a brief explanation on how this info can help you moving forward and how to introduce some of the learned lessons into your own life.
Mindset: The biggest value add I hope this course brings is a mindset shift for the people that need it. I went over a lot of technical details so it's unrealistic to expect you to fully digest 100% of the details (especially if you have low levels of financial literacy). But I do expect for you to have a much better understanding of how Net Worth (and the accounting behind it) works. I had the benefit of receiving a top notch accounting education at a top notch university. The mindset that was instilled in me in my early adulthood has been critical in my journey towards serial entrepreneurship, several investment accounts, a credit score of 800, plus several investment properties. Living and thinking like an accountant has greatly benefited my financial standing and I just want to spread the mindset that helped me so much.
Too many people live with a mindset focused on their cash worth; "Do I have enough to pay my bills and have spending money between paychecks?" However, that is not the mindset it takes to build generational wealth. To build true wealth and improve your life, it takes a Net Worth focus.
Debt: The examples that explain the Principal/Interest mechanics of a loan contain crucial information that is never adequately explained to many. We live in a society built on over-leveraging on debt; if you can't afford something, then get a loan. Whether its for student loans, credit cards, or expensive cars and houses, so many people get buried by expensive debt because they just don't know how it works. Overly accessible debt markets + naive consumers = a profitable combination for the banking industry and bankruptcy for the consumers. The next time you need to get a loan, I hope that you revisit this course so you can properly think through the ramifications for your personal finances.
Investor Relations: Simply understanding the financial lingo can help you on your road to financial freedom. Especially if you are an investor! Accounts like Accounts Receivable and Payable + Retained Earnings are real accounts used by the biggest (and smallest) companies in the world. When you research potential investments and study companies' Balance Sheets and Income Statements, you will now be able to make more sense of the numbers.
Bookkeeping: As I said at the very beginning, bookkeeping is simply data entry for finances. I hope you have a much better idea of what that means now. In the real world, bookkeeping is more simple than our examples. In the real world, the computer programs do all of the Debit and Credit mechanics for us. We mostly just enter numbers and select accounts, but it helps greatly to know the mechanics and rules the computer is playing by.
Accounting systems do not have to be powerful computer systems though. A simple spreadsheet could be all you need to track your numbers and stay on top of your finances. However, I suggest Mint.com for your personal finance bookkeeping. You can customize Mint to track specific expense types and accounts, plus your portal links directly to your bank, credit, and loan accounts for automated, real-time updates. Mint.com essentially takes all of the mechanics and concepts described in this crash course, and does them for you automatically based on transactions from your online accounts. You have to manually update some transactions here and there, and you must routinely monitor your numbers, but Mint.com is hands down the easiest way to become your very own personal finance bookkeeper.
"Do I have to keep all of my receipts as my own bookkeeper?" Good question. Luckily for us we live in a digital world where most of our transactions are tracked online. Our bank accounts are tracked online with usernames and passwords. Same with our credit cards, investment accounts, auto loans, mortgage loans, student loans, etc. Unless you transact in mostly cash (a rarity these days), then you will not need to be master of the receipts to stay on top of your finances. If you are cash heavy then you will need to keep receipts and you will have to manually enter your transactions into Mint.com. Any bookkeeping system, even if it's paper and pen, is better than no system.
There is also a Net Worth tracker app called Personal Capital. Similar to the Mint.com automated account links, it tracks your Net Worth in real time based on the different investment profiles and account links you make. Mint.com in tandem with Personal Capital is the perfect personal finance bookkeeping system! Now you can use them and actually understand what they are doing behind the scenes to calculate different metrics.
Budgeting, though no discussed in this course, is a key part of personal finance bookkeeping. My suggestion to my clients looking to get started with a budget is to perform 2-3 months of active bookkeeping as the prerequisite. This tracking of actual costs gives you a good foundation with which to base your budget off of. You will not only get an idea of the amount of money you spend, but you will also know what expense types to include in your budget. Mint.com has a budgeting feature you can use in collaboration with the real-time, automated transaction tracking. Again, I strongly suggest Mint.com for your personal finance bookkeeping needs. With a powerful tool like Mint.com + the knowledge you've gained from this course, you will be on your way to maximizing
your Net Worth!