Tuesday, November 30, 2010

Finance an Introduction

1) Financial Literacy – Introduction & Importance




Many people don’t even know that What is Financial Literacy & Why is it important?. Well, Financial Literacy means Knowledge about Money, How it works & How to Manage it. Financial literacy is all about how to make money out of money.
What is not Financial Literacy?
Well Financial Literacy is not some getting Rich Quick or overnight scheme. Financial Literacy is not about finding some hot tips in the stock market. Financial Literacy is not about making money in short ways.
Problems that arises because of the Lack of Financial Literacy -
If you don’t know the basics of the Financial Literacy than one or more of the following Money Problems may arise in your Life.
- Going into Excessive Debt up to your eye balls
- Making Bad Investments
- Running out of Money after the Retirement
- Not having enough money for Child’s Education & Future
- You can’t understand what is going on in the economy around the world.
- You don’t know the basics of various Financial Products & How to use them in your favour
- Live Paychecks to Paychecks
- You Find Investing Risky because you have little to No Knowledge about the various Financial Products.
- You may have to file a Bankruptcy because of the Excessive Debt
- You start believing in Stock Market Hot Tips & Make Bad Investments
- You can’t maintain your basic life style after the retirement because of the small retirement corpus
- And Many More……….!!!!!!!
So the above are the few basic Problems that may arise in your life because of the lack of the Financial Literacy. In fact, right now you may suffer from one or more of the following problems.
Importance of Financial Literacy -
Financial Literacy is the solution of the above problems. Many people think that the solution of all of the above problem is Money So being Rich will solve their all of the above problems. But in reality the solution of all of the above problems is not the Money But the Financial Literacy.
Money has power to make you both rich and poor. Excessive Money is not the solution of the above problems. Excessive Money will only Accentuates the above Financial Problems. The Real Solution of the above problems is the Financial Literacy.
Take the Example of Mike Tyson & Michael Jackson. Both of them were Rich & earned lots of Money in their lives but the Excessive Money has not solved their Financial Problems. But in fact today both of them are in a deep debt and at the verge of the Bankruptcy…….
So Excessive Money has not solved the Financial problems of both of the above famous people. And it won’t solve your problem also. The Excessive Money will only Magnify the above problems in your life.
The real solution of the above problems is Financial Literacy. So Understand the Basics of Financial Literacy & be Financially Free & Secure……….!!!!!!!!!!!!

2) The Power of Compound Interest
According to Albert Einstein, “The Compound Interest is the greatest Force in the Universe.” Einstein also once said, “The Compound Interest – 8th Wonder of the World.
The Understanding of Basics of The Compound Interest means what is Compound Interest & How it works is very necessary to get Rich & Financially Free.
Now What is Compound Interest?
Well, to understand, What is Compound Interest, You have to first understand What is Simple Interest?
- The Simple Interest -
The Simple Interest means every year you get the interest on the basic amount. Say for Example, If you Invest Rs.100 today at a rate of 10% per Annum interest rate than after 1 year how much interest you will earn?.
Well, Rs.10 (10% of Rs.100 is Rs.100). So your Total Balance will be now, Rs.110. (Rs.100 + Rs.10 earned as an Interest).
Now how much you earn ate the end of Year 2? Well, again Rs. 10. So your ultimate balance will be Rs.110+10 = Rs.120.
So what will be your Balance after 10 years at a rate of 10% per Annum Simple Interest?
Well, Rs.100 + 10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 = Rs.200
So The Simple Interest means you will earn Rs.10 per Annum at the constant rate forever.
- The Compound Interest -
Now, The Compound Interest means every year you get the interest on the previous amount and not on the Basic Amount. In real life, There is nothing like Simple Interest. In the real world, only compound interest exists.
So today suppose you invest Rs.100 at a rate of 10% per Annum, Compounded Annually than after 1 year your Balance will be Rs.100 + 10 = Rs.110.
At the end of year 2, You will earn 10% interest not on Rs.100, the basic amount but on Rs.110, The Previous Amount.
So at the end of year 2, your balance will be Rs.110 + Rs.11 (10% of 110) = Rs.121.
At the end of year 2, your Balance will be Rs.121 + Rs. 12.1 (10% of 121) = Rs. 133.1
At the end of year 3, your Balance will be Rs.133.1 + Rs. 13.31 (10% of 133.1) = Rs. 146.41
And so on……..
At the end of Year 10, your Balance will be Rs.285.31
It is Rs.85.31 higher than in comparison to the Simple interest. Means in case of Simple interest at 10% per Annum, your 100 rupees invested will become Rs.200 after 10 years while in case of The Compound Interest at 10% per Annum, it will become Rs.285.31 and that is Rs.85.31 more…….!!!!
This is the power of the Compound Interest. Initially it grows in linear proportion but later on it grows in geometrical proportion.
When you take a Credit Card Debt or any other kind of Loan, The Compound Interest work against you and make you poor or even Bankrupt. While whenever you invest your money in some Assets, The Compound Interest work in favour of you & make you Rich, Ultra-Rich.
The Compound Interest over the time is so powerful that, it multiplies your wealth in a breathtaking way….!!!!!
Because of the Compound Interest, the Rich becomes richer over the time. Because of the Compound interest, the 90% of world’s Wealth is concentrated in 10% of the hands while rest of the 10% wealth, shares 90% of people.
Remember, The Golden Rule of Compound Interest,
“Whenever you Save & Invest your Money, The Compound Interest starts working for you and make you rich over the time & Whenever you take any kind of Debt (Loan) means whenever you Borrow Money The Compound Interest starts working against you and make you poor or Bankrupt over the Time.”
This is why Financial Advisors & Finance Gurus say you that, Start Savings & Investing as early as possible in your life means Now….. Because the longer you stay invested, the compound interest will work for you longer and make you more rich over the time………!!!!!!!!!!!


3) Money Users & Providers – The Money Cycle
Well, This is the another Basic Article of Financial Literacy. This is not about getting rich quick or something like that. But this article is about the Money Cycle means how money circulates in the economy & grows?
Basically there are 2 types of people
- Money Users (Governments & Companies (Businesses)) &
Money Providers (Investors)
To Become Rich & Financially Free you have to understand this money cycle.
Money Providers are the Investors like you, me & the Wealthy Individuals. People (All Ultra-rich, Rich, Middle Class & Poor) Invest their money in Government &/or Company Debts & Equities (ownerships) and hope for growing it. There are wide variety of Financial products by which you invest your money and provide it to the money Users. Such as Stocks, Bonds, Mutual Funds, Investment Funds, Private Equity, Venture Capital Funds and many more………
Money Users are the Government & Companies which take money from the Investors & Invest it in Business Infrastructure, Buying Assets, Growing Business & highring talented people (Human Resource). Companies take money from Investors either from Equity route or from Debt Route.
In Equity Route, The Company sells its ownership (Shares) to the large number of public. So buying a stock means you have invested your money in that business and buy a part of that Business. Say for Example, if you buy 100 Shares of Reliance Industries than it means that you have invested that money in Reliance and in exchange of money you have buy that much portion of that Business.
Now the price of the stock moves ups and downs with the underlying value of Assets & Infrastructure of the Company. The Company will Invest your money in its Business on behalf of you and whenever it will make a profit, it will share that profit with you.
In Debt Route, The Company or the Government will issue a Debt Certificate known as Government or Corporate Bonds. So whenever you invest your money in Bonds, it means that the Company/Government is borrowing money from you and after that the Government/Company will invest it in building Infrastructure.
In Case of Government, The Government will take a Debt from you by issuing Bonds & it will invest your money in developing the Country Infrastructure. The main Income source of the Government is Tax. So The Government will collect the Tax from its citizens and will give it back to its lenders (Bond Holders) with interest.
In Case of Company, The Company will use the borrowed money to grow and expand its Business & will give you interest from its profits.
So in Short, if you want to be Rich & Financially Free than you should be either Money Provider or Money User.
You should be either Investor (Debt or Equity) or you should be Money user. If you never Invest nor use the Money than you can never be Financially Free……….
Most of the people around this world are poor and financially struggling because they neither uses nor provides their money…………!!!!!!!!!!


4) The Difference between Equity & Debt
Before reading this Article, First read the Article – Money Users & Providers – The Money Cycle.
This article is all about the relationship between the money users & Money providers by 2 different ways – Equity & Debt.
All of you hear from the Financial advisors repeatedly that, Any Portfolio Must have proper Equity & Debt Allocation. So Why they tell you so? What is basically Equity & Debt is? And what is the relationship between these two?
Well, Any Company can raise the Capital by 2 ways – Equity Finance & Debt Finance.
Debt Finance: -
Well, Debt Finance means a Company or a Government can raise the capital by issuing Debt. In Simple words, Debt Finance means“Borrowing & Lending”. Here the Money users (Company & Government) issues a Debt Certificates (Bonds) and the money providers (Investors like you & me) buy those securities.
By Debt Finance, Governments & Companies raise the desired Capital to fund their various projects and to develop infrastructure & Assets. Here the Company/Government is the Borrower and the Investor is a Lender.
So whenever you buy Government (or Corporate) Bonds, it means that you are the Lender of the Government / Corporate. And The Government is agreed to pay you certain interest.
In case of Debt Relationship, Investor will get fixed amount of return on hi Investment every year.
Equity Finance: -
Well, Equity Finance means a Company can raise the Capital by issuing share certificates. In other words, Equity means the ownership of a Company. Whenever you invest your money in buying Shares (Stocks) of any Company, it means that you are buying that much portion of ownership of that Company.
Here the risk is high and so the return is also high.
Here you are taking the risk of that Business by buying a part of the ownership of that Company. So when the Company will make profits, you will be rewarded more than Debt. So whenever we buy stocks, we are buying an ownership of that Company.
Here is the difference between Equity & Debt -
Equity
Debt
Must be repaid or refinancedCan usually be kept permanently
Requires regular interest payments. Company must generate cash flow to pay.No payment requirements. May receive dividends, but only out of retained earnings
Collateral assets must usually be availableNo collateral required.
Debt providers are conservative. They cannot share any upside or profits. Therefore, they want to eliminate all possible loss or downside risksEquity providers are aggressive. They can accept downside risks because they fully share the upside as well
Interest payments are tax deductibleDividend payments are not tax deductible
Debt has little or no impact on control of the companyEquity requires shared control of the company and may impose restrictions
Debt allows leverage of company profitsShareholders share the company profits

5) What is Leverage?

1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.


2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.


Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.
Leverage in Simple Language -
Example: 1 Let us discuss in the layman’s language that, What is Leverage? Well, suppose you have 1000 Rupees in your pocket. Now with the 1000 rupees you can buy 100 stocks of the Company having its market value Rs.10 each.
So now in case of 10% gain in the stock price (Means the stock price moves up to Rs.11 per stock), your over all profit will be Rs.100 and thus it will become Rs.1100.
Now suppose you have taken Leverage. Means you have used the Futures & Options. So it means that you have put Rs.1000 as a margin money and borrowed (Leveraged) Rs.9,000 from Bank. So now from the Total 10,000 Rupees you will be able to buy 1000 stocks of that Company instead of 100 only. So in case of 10% gain in the stock price will make you a profit of Rs.1000 instead of Rs.100 in the previous scenario.
This is the power of Leverage. It can magnify your Profits (and Loss well). So your over all return on Investment in first scenario will be 10% (Rs.100) and 100% (Rs.1000) in the second scenario.
Example: 2 Now let us discuss the another scenario. Leverage is most commonly used in buying a Home. Say for Example, you are a Real Estate Investor. Now you put Rs.1,00,000 (1 Lakh) as a down payment and borrow (Leverage) Rs.9,00,000 (9 Lakhs) from a Bank to buy the Residential Property of Rs.10 Lakhs.
So now because of the Leverage, you will be able to hold the Asset (Residential Apartment) of Rs.10 Lakhs with only Rs.1 Lakh…. Now you put that Apartment on Rent and divert your rental income towards paying the mortgage and interest of your property. So your Tenant will pay that Mortgage and not you.
Now suppose the property price doubles after 5 years. So it will become Rs.20 Lakhs. And by that time you have paid the mortgage. So now you own a while property of Rs.20 Lakh from just Rs.1 Lakh of Investment only 5 years back. In shirt, The Leverage has magnified your profit. This is the power of Leverage.
Intelligent Investors use Leverage in their favour to become more richer over the time.
Bad Leverage -
Well, Leverage means Borrowed Money. Now Leverage is not all the time Good. You have to buy Assets (Stocks, Real Estate, Businesses…etc) out of the Borrowed Money than and only it will work in favour of you.
What most of the people do is, they use leverage to buy Depreciating items such as Car, Clothes, Electronics, Tours & Travels……etc……. All of these things are depreciating so Leverage will work here but not in favour of you but in favour of your Banker………….
So always use your Financial IQ before taking Leverage………..
I am sure that, after reading this Article, your Financial IQ won’t be the same but it must have been increased……..!!!!!!!!!!
6) An Introduction of Financial Statements
The Knowledge about Financial Statements is very important for being Financially Free & Rich. Not only this but the basic understanding of the Financial Statements will help you to take the informed decisions in buying stocks of any Company.
Financial Statement has 2 basic Parts.
01) Income Statement &
02) Balance Sheet.
This short course will teach you with simple line diagrams in detail about the basics of Financial Statement. After reading this course, you will understand that, how money flows on the Financial Statement.
This is a very important course for those who want to increase their Financial IQ.
Here is a Short Course - “Financial Statement – Basics”
The Only difference between Rich and everyone else is that,Rich know how to read Financial Statements and how to analyze them. Remember, Rich always think in Financial Statements.
If you want to be Rich and Super rich than you MUST learn, “How to Read Financial Statements”
This Short course will cover all the basic aspects of Financial Statements. After reading this whole the short course, You will learn What is Financial Statement, What is the importance of it and How to read and think in Financial Statements like Rich.
Reading, Analyzing & Thinking in Financial Statement is Fun and Excitement………..!!!!!!! You will N’joy it a Lot…..!!!!!
Overview of Financial Statement -
See the Figure above. It is an Oversimplified Line Diagram of a Financial Statement.
I will teach you all the basics of Financial Statement in very Simplified Language and oversimplified Diagrams so that you will be able to understand it in more deep and more details.
Each Financial Statement has 2  major Parts. (See the Figure)
1) Income Statement &
2) Balance Sheet
Again both of these 2 major parts are subdivided into 2 more parts. Income statement has 2 subparts, Income & Expense while Balance Sheet has 2 subparts, Asset Column & Liability Column.
So In Short, Financial Statement has 4 basic Parts, Income, Expense, Asset Column & Liability Column. If you want to be Rich than you have to understand each part of Financial Statement in very detail and not only this but you have to understand the correlation between each of the four parts.
Each part of the Financial Statement has its own characteristics and each part is correlated with different other parts of the Financial statement in different way. And this connection between various parts of the Financial Statement generate various types of Cash flow patterns in Rich, Middle Class, Poor & Ultra-Rich.
Virtually all the Personal Finance advises (Frugality, budgeting, Investments, Reducing expenses, Debt reduction, Credit card debt elimination, Spend less than you earn and every other Financial advise……..) are originated from the Financial Statement only. So Learning the Basics of Financial Statement will cover all of these Personal Finance advises in Simple and easy to understand languages.
Who has Financial Statement?
Any Separate Financial Entity has its own Personal Financial Statement. In other words, anything on this world, that is related to Money has its own Personal Financial Statement.
Individuals, Corporates, Publically Listed Companies, Businesses, Rental Properties, Investments, Government….. all of them have their own Financial Statement. When a doctor see and analyze your Blood & Urine Reports, ECG, X-ray, Sonography and other Investigations, they can judge your Health.
The same is true about your Financial Statement. Financial Statement is the report of your Financial Health. By reading and analyzing Financial Statements, you can judge the Financial Health of that Individual, Business, Company, Government or Rental Property……!!!!!!!!
Remember -
Most of the time people judge anyone’s Financial Health and well beingness by watching their Expensive Cars, Clothes and Expensive Life style. But you should remember that, you can not and you should not judge anyone’s Financial Health without watching and analyzing their Financial Statements.
If someone tells you that, Some so and so fellow is rich than you should tell your self that, May be he/she is Rich but I can’t judge it without reading his/her Financial Statement.
Another Common mistake people do in India is that they judge any Business or Company’s Financial Health by rumor only. They fill IPOs and invest in the stocks of the companies by blindly following rumors and Hot Tips. But you should check and analyze the Financial Statement of any Company before applying for its IPO (Initial Public Offering) or buying a stock of that Company from the stock market. Most of the people of India and this world don’t know how to read financial statements and this is the reason they always lose their money in the stock market. If you have learned to read Financial statement than you should have invested in fundamentally strong companies and thus in the down market also you won’t feel any discomfort.
People earn a lot of money from their Professional career. But when it comes to making and investing Money they simply follow the advise of Brokers or divert their money to someone else to manage it. The reason is because they don’t know how to read and analyze the Financial statements so they can’t make Informed Investment Decision.
This Short Course on “Basics of Financial Statements” is Totally FREE for you. You don’t have to pay anything for it. But it is invaluable. So I advise you to read it further.
Here is a Short Course – Basics of Financial Statements -
Part: 1 Income (Active & Passive)

Picture 003

The Part 1 of the Financial Statement is Income (A Part of the Income Statement). See the Diagram. I am sorry that, the diagram is not made on Software. I have simply draw the line diagram on a piece of paper and just Scan it and put it here. Because I am not good at computers. Of course I can higher the professional services for this but at this point of time, I don’t feel that it is necessary because after all the purpose of educating my readers is solved by these simple diagrams drawn by me.
The main purpose of these diagrams is that, I want to teach you the basics of Financial Statement and this need is fulfilled by drawing simple diagrams on a piece of paper so I think that, it is not necessary here that I hire some professional services to draw these diagrams via software. But even if you are not satisfied with these diagrams than please let me know that so that I can think of hiring some professional services…….
Anyway….. Back to the Topic….
See the Diagram. I have focused mainly in the Income part of the Diagram. There are basically 2 types of Income in the Financial Statements that you should not. One is Active Income and Second is Passive Income.
Active Income –> Active Income is one to earn which you have to do physical (or mental) hard work to earn it. Say for Example Job Income or Professional Service Income. In other words, Active Income means Earned Income or hard earned Income. Income earned by Employees, Doctors, Lawyers, Accountants, MBAs, Teachers, Policemen, Firemen …etc is known as an Active Income.
The main Limitation of the Active Income is that, You have to work hard to earn this Income and not only this but whenever you stop working, this Income will be stopped.
And this point is the origin of The Financial Planning and Retirement Planning. Why Personal Finance advisors advise you to do Retirement Planning? Well, because after retirement, you will stop working. So you will stop earning Active Income. So How will you survive?………
Well, the answer is the second type of Income.
Passive Income –> Passive Income is one to earn which you don’t have to do any physical (Or mental) hard work. The Passive Income flows into your Income Statement from the Asset Column (We will discuss it later in more details). See the Diagram above.
In the Diagram, The passive Income has originated from the Asset Column of the Financial Statement. The Examples of Passive Income are Stocks (Dividends & Capital Gains), Bonds (Interest Income), Gold (Capital Gains), Real Estate (Rental income & Capital Gains), Businesses, Blogs & Websites (Google AdSense Income exactly same like Rental Income & Capital Gains when you sell your Blog/Website exactly like when you sell your Real Estate).
So this the reason why rich work on their Asset column to grow so that their passive Income increases. Middle class work hard to increase their active Income while Rich people work hard to increase their Passive Income (By Growing their Asset Column).
Blogs & Websites Income is the new type of passive Incomeand very few articles and literature is written on it. So How the Income from Blog/Website is a Passive Income & not the Active Income? Well, See. Take the Example of “My Journey To Billionaire Club”. MJ2BC is a Blog and I have started this Blog in March 2008. I have started this Blog by launching just 15 Articles on it. And today the size of the Blog Archive of this Blog is more than 500+ articles and growing. And I earn a handsome return from Google AdSense Program by displaying adds on this Blog. Now previously only 15 articles were earning money for me. But today 500+ articles are earning money for me. And tomorrow much more articles will be earn money for me.
All Hard work I do behind this Blog is to increase the “Blog Archive” (Asset) of this Blog only. Right now I am earning $ 5-6 per Month from This blog. If Suppose today I stop working than also I will continue making the same $ 5-6 from this site. Because the articles that I have already post on this Blog are valuable and they will continue attracting some basic average traffic on this blog for ever and that will generate a cash flow for me. But I am working on this Blog because I want to increase the size of the “Blog Archive” of this Blog so that it can attract and accommodate much more traffic and thus can generate much more Revenue for me…..
So Blog/Website Income is the passive Income.
Remember,
- If you want to be Rich, Financially Free and want to enjoy your life than you need to build a strong passive Income. Most of the time people struggle financially because they try to increase their active Income by taking higher education and doing overtime at their job places.
The Financial advises Start Savings & Investing Early, Invest in Retirement & Pension plans…etc are originated from the Concept of developing a passive Income. The more you develop passive income for you, the more you will be financially stable and the less you will have to depend on your job.
- Rich people are financially free because they have multiple streams of passive Income. Middle class people will always remain middle class no matter how much they earn because the main source of their Income is an Active Income. They have never developed a Passive Income.
- Personal Finance is all about developing multiple streams of Passive Income.
Part: 2 Expense (Good & Bad)
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s I have already told you that, All the Personal Finance, Business & Investment advises are originated from the various parts of the Financial Statement only and that's why it is important to learn the basics of the Financial Statement.
The 2nd Part if the Financial Statement is “Expense” Statement (A Part of an Income Statement).
Basically there are 2 types of Expenses. One is a Good Expense& Second is a Bad Expense. And Personal Finance is all about Reducing Bad Expenses & Increasing Good Expenses.
Good Expenses –> Any Asset producing Expense is known as a Good Expense. See the diagram. Any Expense that will produce an Asset (We will discuss all about Asset column in detail later on) at the end is known as a Good Expense. Such as Real Estate Mortgages, Student Loans, Educational Loans, Business loans, Business equipment loans…..etc….. Remember, Rich always do Good Expenses while poor and middle class always do Bad Expenses.
All the Personal Finance advises about Expenses are originated from here.
Bad Expenses –> Any Liability producing Expense is known as a Bad Expense. See the Diagram. Any expense that will produce a Liability (We will discuss all about liability column in detail later on) at the end is known as a Bad Expenses. Examples of Bad Expenses are Expensive Cars, Credit Cards, Shopping, Personal loans, Consumer Loans…etc….
The Best Personal Finance Advise, “Frugal Living” is originated from this part of the Financial Statement.
Most of the people of India have a false belief that, people who spend money behind Liabilities (Bad Expenses) Are Rich people and everyone else is a Middle class or poor. But the reality is exactly reverse. In reality, anyone who does Bad Expenses more is a Typical Middle class while anyone who does Good Expenses is a Rich.
So it is very important that you observe and analyze the types of expenses of anyone before you make a judgment in your mind about that person. Remember, Rich always do Good Expenses while poor and Middle class always do Bad Expenses.
If you want to be Rich in your life than always do Good Expenses (Asset producing) in your life. And stay away from Bad Expenses (Liability producing Expenses).
Part: 3 Asset Column – Everything about Growing your Asset Column
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The 3rd Part of the Financial Statement is “Asset Column”.This is the best and most interesting part of the Financial Knowledge. The Secret of becoming Rich is in this part of the Financial Statement. And personal Finance advises such as Start savings & Investing early, Invest for your retirement are originated from here.
Many Entrepreneurial advises such as create your own Business (Means create your own Asset) are originated from here.
Not only this but Con programs like Get rich quick, How to be rich, How to make Money Online are also originated from this part of the Financial Statement only.
So if you understand the Asset Column very well than, You will understand the Whole Mystery of Money and Getting Rich. Also read the “Related Articles” of this Post. You can’t understand the whole Mystery of Asset Column in one article only. Learning basics of Asset Column is fun and interesting. Believe me, You won’t get bored here…..
Remember, It is the “Asset Column” of anyone’s Financial Statement which is responsible for making that person Rich”.Most of the people around this world has a false belief that, if the Income is high, the person is Rich but this is a Myth. Income is not at all an indicator of your being a Rich. It’s the Assets. If anyone’s Asset Column is full of valuable Assets than he/she is known as a Rich.
So What is Asset?
Well, Asset means anything which is likely to appreciate in future as well as it may(or may not) provide you cash flow at present. In Simple words, Asset is something which will put money into your pocket. So anything which is likely to appreciate in its value in future as well as provide you a steady cash flow is an Asset.
Examples of Assets – Stocks, Bonds, Gold, Real Estate, Businesses, Art, Intellectual properties, Rental properties, Blogs, Websites, ….etc….
What you should do with your Asset Column to be Rich?
Well, you have to Grow it. Remember, Rich people focus on growing Asset Column of their Financial Statement. The more you grow your Asset Column, the more you will be Rich, Super-rich.Growing an Asset Column is the key of Financial Success, Secret or path of being Rich and Wealthy or whatever you want to call it.
You can not grow your Asset column in one night or in one weekend or in one year. Growing an Asset Column takes a time, a long time and sometimes decades………..
If today, some person is Rich (Means having a vibrant Asset Column) than it means that in past that person has struggle a lot behind growing his Asset Column. Growing an Asset column is not an easy task. It requires lots of thinking, motivation and lots of hard work……. But it’s worth it…..
So How can you grow your Asset Column?
You can grow your Asset Column by 3 ways. Acquiring, Converting & Creating Assets.
01) By acquiring Assets – You can simply acquire assets out of your money such as stocks, bonds, gold, real estates, art…etc…. This is the commonest way of growing your Asset column. You don’t have to use your brain much in this way.
02) Convert something into Asset – You can convert something into cash flow producing asset. You have to use a little bit of your brain behind converting something into an Asset. Say for example, if you are an avid book reader and you have a collection of books at your home that you have already read than you can give these books on rent to other people. So now your books are your assets because they are generating cash flow for you.
03) Create Assets – This is the most exciting but most nerve wrecking exercise of your mind. If you want to grow your asset column very fast than you just have to create assets that millions of people want to buy. Take the Example of Dhirubhai Ambani, The founder of Reliance Industries. Reliance Group is Dhirubhai’s Asset. And Dhirubhai has created it. And today the Reliance is publically listed and million of people want to buy shares of it.
Another Example is, “My Journey To Billionaire Club”. MJ2BC is my Asset and I have created this Asset out of my knowledge and investment of time only. I spend every single free hour of my day (almost 10-14 hours a day) behind developing this Asset (This Blog) and today after almost 10 months of Blogging, this blog has started providing me a fairly good income from Google AdSense. So this is how I have created my own Asset and put it into my Asset Column. And not only this but according to Technorati’s software, the Net Worth of this Blog is around US $ 2800 and that is roughly Rs.1.40 Lakhs. So if today I sell this blog than I can sell it as a fair price of Rs.1.40 lakhs. So withing 10 months I have created an Asset (This Blog) worth Rs.1.40 Lakhs today out of investing my Time only.
Creating your own Asset is most exciting, nerve wrecking and a mind game. It requires a lot of hard work but its fun, exciting and worth it. Middle class people call it Risky. But if you know exactly what you are doing than it is not risky. Take the Example of this Blog. When I have started this Blog, my so many friend had told me that This is risky because there are 110+ Millions Blogs in the Blog sphere. And out of them there are literally hundreds of thousands of Personal Finance Blogs. Than who will read your Blog? There is a too much competition out there. But I knew that I was creating an Asset and Personal Finance is my PASSION so I never feel it risky to start and run this Blog. Instead I am enjoying watching this Asset (This Blog) grow right now (Both in Revenue and Valuation). And watching your own Asset growing is a Fund and Exciting……….It’s not risky……!!!!!!!!
So I also want you to do the same. Grow your Asset column and watch it grow……….
Part: 4 Liability Column – Everything about reducing your Liability
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The Part 4 of the Financial Statement is “Liability Column” (See Diagram). The Basic knowledge and understanding of the liability is very important to be Rich and Financially free.
Middle Class people are the ones who simply LOVE liabilities. They simply can’t live without liabilities. And their main focus in their life is to grow Liability Column to look cool and rich.
Rich are one who focus to reduce their liability column. Rich always stay away from new Liabilities. Rich Never buy Liabilities.
What it means by Liability?
Well, Liability is something which takes money away from your pocket. In Simple words Liability is something which makes you expenses as well as it will depreciate in its price over the time. Say for Example, A Car. A Newly bought car will lose more than 60% of its value within first few years of its buying. And not only this but it will make you expenses such as maintenance and all……
Examples of Liabilities are, Credit Cards, Personal Loans, Expensive Cars, Watches, Consumer Debts, Shopping, Club Memberships, Electronics, Mobile Phones, Consumer Debt….etc…
See the diagram. Diagram shows that, Middle class people buy Liabilities out of their Income. When ever they have a spare money on hand they simply go out and shop and buy one new liability and add it into their liability column. And one day when they get up in the morning, they find themselves in a deep debt (Liability) and from that day they can’t stop working.
The following Personal Finance advises have been originated from the Liability Column of the Financial Statement.
- Getting out of Debt
- Cut down all of your credit cards
- Stay away from Consumer Debt and Personal Loans
- Buy second hand cars
- Buy what you need and not what you want
- Don’t show off. Don’t try to look cool and rich by getting into debt……..etc…….
And not only this but the whole basic concept of Debt Reduction, Debt Consolidation, Debt Counseling and Financial Counseling is around the Liability Column of your Financial Statement.
The Logic behind all of the above principles and services such as Debt Consolidation/Debt counseling is around reducing your Liabilities in your Liability Column. If you can effectively reduce the liabilities in your liability column than you are Success……. All the Personal Finance advises and frugal living teaches you to stay away from New Liabilities as well as focus on reducing your existing Liabilities.
Reducing Liabilities on your Financial Statement is also a broad topic and demands so many articles to understand. But here the basic purpose of this Article is to give you brief Information about Liability Column and how it affects your Finance and How rich & every one else views and treat the Liability Column of their Financial Statement……….
Part: 5 Cash flow – Cash flow pattern of Poor, Middle Class, Rich & Ultra-Rich….
So by far you have understand the all the basic 4 parts of the Financial Statement. You have also learned that virtually all of the Personal Finance & Investment advises of this world have been originated from the Financial Statement only.
It is very important that your Financial Statement should be healthy if you want to become rich. Once you leave the school, in real life, your Financial Statement is your score card and measure of your Success. The more healthy your Financial Statement, the more rich and Financially free you are.
Part 5 of this Short course is, Cashflow. The Cashflow pattern of the Financial statement correlates different segments (Parts) of the Financial Statement and by knowing the cashflow in detail, you will be able to understand the relationship between 2 parts of the Financial Statement.
So What is Cashflow?
Well, in Mathematical words, Cashflow = Income – Expense.
So whatever Income left after deducting your monthly expense from it, is your cash flow. Cashflow can be positive (if Income is more than your Expense) or it can be Negative (if Expense is higher than your Income).
In Simple words, Cashflow pattern means from where to where the money runs into your Financial Statement. It means that from which part of your Financial Statement Money enters, how it flows into your Financial statement and how it exits from the Financial Statement?
The understanding of cashflow pattern will help you to understand the relations between various parts of the Financial Statement.
The Analysis of the Cash flow pattern will help you to decide the Financial future of any individual. Yes, This is true. You can predict anyone’s Financial future by 100% sure just like astrologers by reviewing and analyzing their Cashflow pattern on their Financial Statements.
Here are the different types of Cash flow patterns. Remember it in your mind and embossed it in your mind.Compare your Cash flow pattern with the following various types of patterns. Find out that which pattern matches your pattern. And it is not a cashflow pattern of Rich than I advise you to just change that cash flow pattern to Rich in your Mind. Out of following Cash flow patterns, your Cashflow pattern should be of 1 & 5 means a Cash flow pattern of an Asset & Rich/Ultra-Rich.
Another very important observation is that, I have observed in my life that, when ever you earn a lot of money in your life, ultimately it accentuates (Magnifies) the Basic Cash flow pattern in your mind only. The more money does not necessarily make you Rich or Financially Free. The More money can only Accentuates (Accelerate/Magnify) the cashflow pattern of your mind only. And that’s why it is very important that, you understand various types of cashflow pattern.
The best examples are Michael Jackson & Mike Tyson. Both of these people have earned a great deal in their life. But the more money did not make them Rich. In fact they are Bankrupt today…… Why? Well, because in their mind, the basic cashflow pattern was that of Middle class (No.4). Means Earn More, Spend More, Buy Liabilities out of your Money, Don’t buy Assets, thus liabilities will make you more expenses in your life and thus you are deep in debt and ultimately bankrupt. More Money in their life has only accentuate (Magnify) the Basic Cashflow pattern of their mind.
So That’s why there is a saying that More Money has power to make you Rich & Poor Both. And that’s why Financial Literacy and the knowledge of Financial Statement is very important. This is why Personal Finance Gurus advise us to learn the basics of Personal Finance because all the personal finance is origanted around the one concept only and that is Keep your Financial Statement Healthy.
a) Cashflow Pattern of Asset
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So by now you understand that What is Cashflow pattern and what is the importance of knowing a cash flow pattern of anyone. Anyone’s Financial future is predictable. You just have to analyze the cashflow pattern on their financial statements.
See The above Diagram. The diagram shows the cashflow pattern of Asset & Liability.
Cashflow Pattern of Asset –> Asset generates new Money and puts money back into your Financial statement via Passive Income
Cashflow Pattern of Liability –> Liability takes Money away from your Financial statement through Expense. A Liability will make you expenses and thus it will erode your wealth.
In other words, if you want to be rich than you have to make such an arrangement in your financial statement that the more and more money will flow inside your Financial Statement and not outside it. Thus, you have to acquire more Assets in your Asset column if you want to be Rich. Remember, Rich people have only one focus in their life and that is their Asset Column. They focus only on their Asset Column. They spend most of their time behind growing their asset column and that’s why they are Rich. Rich people have typically spend years of their time behind growing their Asset column (Sometimes Decades) and That’s why they are rich today.
Say for Example, Take the Example of Bill Gates, Dhirubhai Ambani, Warren Buffet….etc…. All of these people are rich today because they have spend lots of time behind growing their Asset Columns in the past.
Middle Class people do exactly reverse of this and that’s why they are Middle class. Means Every time when Middle class people earn Money, they simply buy more liabilities in their Liability Column. They never focus on growing their Asset Column.
Take the Examples of Michael Jackson & Mike Tyson. Both of these people have earned literally millions of dollars in their life but still they are Bankrupt today. Because they have never focused in their life for growing the Asset Column. They have always focused on growing their Liability Column by expensive life styles, Home, Car, Jewellery…etc…
So Remember the above Cashflow pattern of Assets & Liabilities in your mind. Don’t forget it…..!!!! Embossed it in your mind. And before buying anything in your life, simply think that which kind of cashflow pattern it will produce on my Financial Statement and than only decide to buy that item.
b) Cashflow Pattern of Liability
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So by now you understand that What is Cashflow pattern and what is the importance of knowing a cash flow pattern of anyone. Anyone’s Financial future is predictable. You just have to analyze the cashflow pattern on their financial statements.
See The above Diagram. The diagram shows the cashflow pattern of Asset & Liability.
Cashflow Pattern of Asset –> Asset generates new Money and puts money back into your Financial statement via Passive Income
Cashflow Pattern of Liability –> Liability takes Money away from your Financial statement through Expense. A Liability will make you expenses and thus it will erode your wealth.
In other words, if you want to be rich than you have to make such an arrangement in your financial statement that the more and more money will flow inside your Financial Statement and not outside it. Thus, you have to acquire more Assets in your Asset column if you want to be Rich. Remember, Rich people have only one focus in their life and that is their Asset Column. They focus only on their Asset Column. They spend most of their time behind growing their asset column and that’s why they are Rich. Rich people have typically spend years of their time behind growing their Asset column (Sometimes Decades) and That’s why they are rich today.
Say for Example, Take the Example of Bill Gates, Dhirubhai Ambani, Warren Buffet….etc…. All of these people are rich today because they have spend lots of time behind growing their Asset Columns in the past.
Middle Class people do exactly reverse of this and that’s why they are Middle class. Means Every time when Middle class people earn Money, they simply buy more liabilities in their Liability Column. They never focus on growing their Asset Column.
Take the Examples of Michael Jackson & Mike Tyson. Both of these people have earned literally millions of dollars in their life but still they are Bankrupt today. Because they have never focused in their life for growing the Asset Column. They have always focused on growing their Liability Column by expensive life styles, Home, Car, Jewellery…etc…
So Remember the above Cashflow pattern of Assets & Liabilities in your mind. Don’t forget it…..!!!! Embossed it in your mind. And before buying anything in your life, simply think that which kind of cashflow pattern it will produce on my Financial Statement and than only decide to buy that item.
c) Cashflow Pattern of Poor



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See the above diagram. The above diagram is a cashflow pattern of Poor people. Poor people does not have any Asset or Liability.
Poor Cashflow Patter –> Each Month poor people earn Money. They bring this money home. They neither buy assets nor buy liabilities out of it. They simply spend all of that Money. They spend last rupee they earned before the end of the Month and again at the end of the Month they become poor and wait for next month pay check.
Most of the people of India are Poor because they have the above cash flow pattern on their Financial Statements. Every month they earn money and before the end of the next month they spend all of that money and thus they remain poor for all of their life.
Some Inherited Rich people or Lottery Winners also become Bankrupt and poor again because they don’t have any Financial IQ to handle that excessive Money. So they spend all of that money they earn from Inheritance or Lottery Winning and thus become poor again.
So more money does not make you rich of financially free. But the more money will only accentuates the basic cash flow pattern of rich, middle class or poor in your mind.
d) Cashflow Pattern of Middle Class
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The diagram shows the cashflow pattern of Middle Class. Typical Middle class people have the above cashflow pattern in their life.
Middle Class Cashflow Pattern –> Every Month Middle class people work hard at their job place & earn Money, They bring home a paycheck, they go to market and buy liabilities out of that. They buy Credit cards, car, personal loans, expensive shoppings, Mobiles, laptops, electronics, consumer items and everything else. So their liability column grows over the time and make them more expenses. One time comes when all of these liabilities make so much expenses (see the diagram) that their Income can’t cover all the expenses that liability incur. And Middle class people love liabilities so much that they don’t want to compromise with it. So they go to their job, work harder than before, do over time, do part time jobs and earn more money to home so that they can cover all the expenses that liability incur.
But at the end of Day, all the money they earn will simply go out of their Financial Statement via route of the liability (see the diagram) and once the money leaves their Financial statement via expenses generated by Liabilities, it never comes back into their Financial Statement because Middle class have little to NO Assets.
Again, some inherited people and high earned professionals such asMichael Jackson & Mike Tyson went Bankrupt because they had the Cashflow patter of Middle class in their mind. Sp every time when they earn money, they used to buy liabilities out of it. And these liabilities used to make HUGE HUGE Expenses for them. And thus one day all of them went Bankrupt.
A Wide Indian Population of India is Middle class because it has the cashflow pattern of Middle class. And this population is known as Consumer Population (Liability Lovers) in Business terms. And Every Business love these types of people because they spend everything they earn behind buying Liabilities such as Debt products, credit cards, shopping, clothes, consumer electronics, car, mobiles, laptops…….etc….
Beware………..If you have the above cashflow pattern, than change it to that of Rich. Otherwise whenever in your life more money will come, only the cashflow pattern will accentuates. And if your cashflow is like buying liabilities out of your Income instead of Assets, than it is a serious problem and you need to change it as early as possible means NOW…!!!!
e) Cashflow Pattern of Rich & Ultra-Rich
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See the Diagram. The diagram shows the cashflow pattern of rich or a person going to be rich in future.
Cashflow Pattern of Rich –> Rich also do the job in the early part of their life. Means they also go to job and do hard work and every month take money home in their early life. But unlike Middle class, Rich divert all of this earned Money towards their Asset Column. Rich always buy Assets (Such as stocks, bonds, gold, art, real estate, blogs, websites, intellectual properties, businesses….etc) out of their money. They Never touch Liabilities at least in the early part of their life.
So what happens in the Long run? Well, again see the above diagram. When the Time passes, the assets in their Asset column grows and start throwing additional passive income for them (Line 1) and rich are so smart that they again re-divert this Income towards their Asset Column and thus their Assets grow much more faster than anyone else’s and this large assets provide huge Passive income (Line 2 in diagram).
And this cycle continues until the day come when the Passive Income from their Asset column outgrowns their Earned (Job) Income and from that day they leave their full-time job and only focus on growing their Asset Column.
So after that, Each time whenever their Assets earn Money for them, they simply acquire new Assets and add it into their Asset column or they re-invest that money into the same assets to grow it more than before.
Not only this but Rich also spend their Money behind creating Assets also. Creating Assets means developing your own Business.
Say for Example, Bill Gates & Dhirubhai Ambani. Founders ofMicrosoft & Reliance Industries respectively. Both of these persons have spend their money behind creating and growing their own Assets, Microsoft & Reliance. Today these Assets are so much outgrown that, they are world’s richest people.





7) Inflation, Tax & Debt - 3 Major Wealth Killers -
Have you ever think that, Why most of the people around this world struggle Financially? Why they compromise their freedom in exchange of a Paycheck every month?

Well, Because there are 3 Major Wealth Killers, which forces most of the people to work like a slave in the economy.

01) Inflation

02) Tax &

03) Debt

The above 3 are the main 3 factors which work against the people and force them to struggle hard financially and work like a slave in the economy.

While Rich are Financially Intelligent. They are Financially Literate. So they make these factors work in favour of them rather than working hard like a slave in the economy under the effect of these 3 factors.
So Let us discuss that, How rich people make these 3 factors work in favour of them?

01) Inflation -

Well, Inflation is the silent killer of your Money. It erodes the purchasing power of your money over the time. The only way to beat the Inflation is, You buy some Asset out of your Money and that is known as Investment. You can buy any Asset such as Stocks, Bonds, Gold, Mutual Funds, Real Estate, Art....etc.... The principal is that, Asset can beat the Inflation. Asset means any Asset.

Let me give you my Example. Previous week, I had Rs.20,000 extra with me. So What I did? I bought a Portfolio of Finance Articles out of this money. And I will Publish it on this blog very soon. This Portfolio of Articles is my Asset which will beat the inflation for me.

02) Tax -

Rich & Financially intelligent people avoid the Tax with the help of the Corporate Structure.

03) Debt -

There are basically 2 types of Debt. One is Good and the other is Bad. Any Asset producing Debt is a Good Debt & any Liability producing Debt is a Bad Debt.
Rich always take a Good Debt while middle class and poor always take a Consumer (Bad) Debt. Rich take Debt to grow their Assets more. Rich use Debt to get more richer than before. While poor & Middle class become more poorer after taking a Debt.

So Protecting your wealth against Tax, Inflation & Debt is a mind Game. If you somehow make these 3 major factors work in favour of you than you can be extremely rich......!!!!!!


8) Difference between Equity & Debt


We use the word “Equity” & “Debt” in put daily conversations. We also hear both of these words from Financial Experts in News Channels & in Finance Magazines, Blogs & Forums. But Do you know the difference between Equity & Debt?
Do you know What is Equity & What is Debt? -
What is Equity? -
Well, in simple language, Equity means a piece of ownership. Say for example, if you own 10 stocks of Reliance Industries today than what it means? Well, it means that you are the owner of that much portion of Reliance Industries.
Equity reflects ownership interest in the Company. Equity is not just the piece of paper or a ticker symbol on the stock exchange. But it has ownership interest in the Company. Mukesh Ambani is the Chairman of the Company because he owns almost 55% of Equity of Reliance Industries through its Promoter Group Companies.
What is Debt? -
Well, The Debt means borrowed money. Suppose a Company wants to borrow huge amount of capital but the amount of borrowed capital is so much that only one Bank or Financial Institute can’t lend it. So the Company issue a Debt Paper. Means Company borrows little amount of money from the mass population. So anyone who buy Bonds of that Company will become a lender of that much portion of Company’s Debt.
Government also goes into Debt by issuing Government Bonds. The Federal Bank of United States also goes into Debt by issuing Treasury Securities in which other countries of world & Investors invest.
Equity & Debt has negative correlation so any Portfolio should have the combination of Both Equity & Debt.
9) Equity Finance Vs Debt Finance
Corporate Finance is the very important area of Investment Banking. It has mainly two arms – Equity Finance & Debt Finance.
Any Company can raise Money by two ways -
01) Equity Finance – In case of Equity Finance, Company sells its ownership (Shares) to the investors and raise money for its Expansion, Growth & Future Projects.
The advantage of Equity Finance is that, here the company does not have to pay any interest rate on the amount it has raised from investors because it has raised this amount through selling its ownership stake. So even if the company does not do well, the investors will lose their money but the Company don’t have to give back that money to the Investors.
And suppose if the Investor wants to exit from the Company, he/she has to find another investors and sale his stake to that Investor.
The Disadvantage of Equity Finance is that, Here the company has to raise money at the cost of selling its ownership. And thus the ownership of promoters of the company reduces or gets diluted.
02) Debt Finance – In Case of Debt Finance, Company goes into a Debt & issues Corporate Debt Certificates to the Investors and raise money for its Expansion, Growth & Future Projects.
The Advantage of Debt Finance is that, here the company does not have to sell its stake to raise money so that the ownership interest of the founders of the company does not gets diluted. However, This Debt is secured by Company’s Assets so in case of default, the company may have to sell its some of the Assets.
The Disadvantage of Debt Finance is that, excessive debt makes the company less lucrative for investments and increase the chances of its default.
In short, A Company can raise Capital to finance its various projects by any one of the above 2 Financing Methods.
10) Large Cap Stocks – Definition & Examples
We use the words Large cap, Midcap & Small cap stocks everyday in our life but many few people know the exact meaning of these words. So let us discuss today what it means by Large cap stocks?
First of all let us understand what it means by Market Capitalization?
Market Capitalization means share price of any Listed Company multiplied by total number of outstanding shares of that company. Say for Example, if Company ABC has 10,000 shares and the share price is Rs.100 per share than the market capitalization of Company ABC is 10,000 multiplied by 100 = Rs.10,00,000 (10 Lakh).
Now here is the definitions of Large Cap, Mid cap & Small cap stocks -
  • Large-cap: $10 billion–$200 billion
  • Mid-cap: $2 billion–$10 billion
  • Small-cap: $200 million–$2 billion
However, let me tell you that these are today’s numbers but these numbers may vary country to country and time to time. Say for Example in 1950s, the market cap of more than US $ 1 billion used to be Large Cap.
Now all the 30 stocks of Sensex are Large Cap means each of them have Market capitalization of more than US $ 10 Billion. Here are few Examples of Large Cap stocks of India.
01) Reliance Industries
02) ICICI Bank
03) HDFC Bank
04) SBI Bank
05) Infosys
06) L & T
07) ONGC
08) Maruti
09) NTPC…etc…
11)How to Read a Financial Statement?
Many people don’t know that How to Read Financial Statement. So here I have developed a short course on Basics of Financial Statement.
After reading this course, you will understand the basics of Financial Statement & How to read it in very detail. Once you leave your School, your Financial Statement is the Score Card of your Life’s Success.
Rich people always think in Financial Statements and that’s why they are rich today. This Short Course will guide you through the each and every aspect of basics of the Financial Statement. Once you learn how to read a Financial Statement, you will understand why rich people are rich and how to think like Rich people.
You will also learn in this short course that Why it is very necessary to think & Make money in the Asset Column rather than in any other column to get rich quick. Once you learn how to read a Financial Statement, it will be easier for you to get rich.
So What are you waiting for? This Short Course is Totally FREE for you. Just read it & Increase your Financial IQ….!!!!
Here is the Course
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The Only difference between Rich and everyone else is that,Rich know how to read Financial Statements and how to analyze them. Remember, Rich always think in Financial Statements.
If you want to be Rich and Super rich than you MUST learn, “How to Read Financial Statements”
This Short course will cover all the basic aspects of Financial Statements. After reading this whole the short course, You will learn What is Financial Statement, What is the importance of it and How to read and think in Financial Statements like Rich.
Reading, Analyzing & Thinking in Financial Statement is Fun and Excitement………..!!!!!!! You will N’joy it a Lot…..!!!!!
Overview of Financial Statement -
See the Figure above. It is an Oversimplified Line Diagram of a Financial Statement.
I will teach you all the basics of Financial Statement in very Simplified Language and oversimplified Diagrams so that you will be able to understand it in more deep and more details.
Each Financial Statement has 2  major Parts. (See the Figure)
1) Income Statement &
2) Balance Sheet
Again both of these 2 major parts are subdivided into 2 more parts. Income statement has 2 subparts, Income & Expense while Balance Sheet has 2 subparts, Asset Column & Liability Column.
So In Short, Financial Statement has 4 basic Parts, Income, Expense, Asset Column & Liability Column. If you want to be Rich than you have to understand each part of Financial Statement in very detail and not only this but you have to understand the correlation between each of the four parts.
Each part of the Financial Statement has its own characteristics and each part is correlated with different other parts of the Financial statement in different way. And this connection between various parts of the Financial Statement generate various types of Cash flow patterns in Rich, Middle Class, Poor & Ultra-Rich.
Virtually all the Personal Finance advises (Frugality, budgeting, Investments, Reducing expenses, Debt reduction, Credit card debt elimination, Spend less than you earn and every other Financial advise……..) are originated from the Financial Statement only. So Learning the Basics of Financial Statement will cover all of these Personal Finance advises in Simple and easy to understand languages.
Who has Financial Statement?
Any Separate Financial Entity has its own Personal Financial Statement. In other words, anything on this world, that is related to Money has its own Personal Financial Statement.
Individuals, Corporates, Publically Listed Companies, Businesses, Rental Properties, Investments, Government….. all of them have their own Financial Statement. When a doctor see and analyze your Blood & Urine Reports, ECG, X-ray, Sonography and other Investigations, they can judge your Health.
The same is true about your Financial Statement. Financial Statement is the report of your Financial Health. By reading and analyzing Financial Statements, you can judge the Financial Health of that Individual, Business, Company, Government or Rental Property……!!!!!!!!
Remember -
Most of the time people judge anyone’s Financial Health and well beingness by watching their Expensive Cars, Clothes and Expensive Life style. But you should remember that, you can not and you should not judge anyone’s Financial Health without watching and analyzing their Financial Statements.
If someone tells you that, Some so and so fellow is rich than you should tell your self that, May be he/she is Rich but I can’t judge it without reading his/her Financial Statement.
Another Common mistake people do in India is that they judge any Business or Company’s Financial Health by rumor only. They fill IPOs and invest in the stocks of the companies by blindly following rumors and Hot Tips. But you should check and analyze the Financial Statement of any Company before applying for its IPO (Initial Public Offering) or buying a stock of that Company from the stock market. Most of the people of India and this world don’t know how to read financial statements and this is the reason they always lose their money in the stock market. If you have learned to read Financial statement than you should have invested in fundamentally strong companies and thus in the down market also you won’t feel any discomfort.
People earn a lot of money from their Professional career. But when it comes to making and investing Money they simply follow the advise of Brokers or divert their money to someone else to manage it. The reason is because they don’t know how to read and analyze the Financial statements so they can’t make Informed Investment Decision.
This Short Course on “Basics of Financial Statements” is Totally FREE for you. You don’t have to pay anything for it. But it is invaluable. So I advise you to read it further.
Here is a Short Course – Basics of Financial Statements -
Part: 1 Income (Active & Passive)
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The Part 1 of the Financial Statement is Income (A Part of the Income Statement). See the Diagram. I am sorry that, the diagram is not made on Software. I have simply draw the line diagram on a piece of paper and just Scan it and put it here. Because I am not good at computers. Of course I can higher the professional services for this but at this point of time, I don’t feel that it is necessary because after all the purpose of educating my readers is solved by these simple diagrams drawn by me.
The main purpose of these diagrams is that, I want to teach you the basics of Financial Statement and this need is fulfilled by drawing simple diagrams on a piece of paper so I think that, it is not necessary here that I hire some professional services to draw these diagrams via software. But even if you are not satisfied with these diagrams than please let me know that so that I can think of hiring some professional services…….
Anyway….. Back to the Topic….
See the Diagram. I have focused mainly in the Income part of the Diagram. There are basically 2 types of Income in the Financial Statements that you should not. One is Active Income and Second is Passive Income.
Active Income –> Active Income is one to earn which you have to do physical (or mental) hard work to earn it. Say for Example Job Income or Professional Service Income. In other words, Active Income means Earned Income or hard earned Income. Income earned by Employees, Doctors, Lawyers, Accountants, MBAs, Teachers, Policemen, Firemen …etc is known as an Active Income.
The main Limitation of the Active Income is that, You have to work hard to earn this Income and not only this but whenever you stop working, this Income will be stopped.
And this point is the origin of The Financial Planning and Retirement Planning. Why Personal Finance advisors advise you to do Retirement Planning? Well, because after retirement, you will stop working. So you will stop earning Active Income. So How will you survive?………
Well, the answer is the second type of Income.
Passive Income –> Passive Income is one to earn which you don’t have to do any physical (Or mental) hard work. The Passive Income flows into your Income Statement from the Asset Column (We will discuss it later in more details). See the Diagram above.
In the Diagram, The passive Income has originated from the Asset Column of the Financial Statement. The Examples of Passive Income are Stocks (Dividends & Capital Gains), Bonds (Interest Income), Gold (Capital Gains), Real Estate (Rental income & Capital Gains), Businesses, Blogs & Websites (Google AdSense Income exactly same like Rental Income & Capital Gains when you sell your Blog/Website exactly like when you sell your Real Estate).
So this the reason why rich work on their Asset column to grow so that their passive Income increases. Middle class work hard to increase their active Income while Rich people work hard to increase their Passive Income (By Growing their Asset Column).
Blogs & Websites Income is the new type of passive Incomeand very few articles and literature is written on it. So How the Income from Blog/Website is a Passive Income & not the Active Income? Well, See. Take the Example of “My Journey To Billionaire Club”. MJ2BC is a Blog and I have started this Blog in March 2008. I have started this Blog by launching just 15 Articles on it. And today the size of the Blog Archive of this Blog is more than 500+ articles and growing. And I earn a handsome return from Google AdSense Program by displaying adds on this Blog. Now previously only 15 articles were earning money for me. But today 500+ articles are earning money for me. And tomorrow much more articles will be earn money for me.
All Hard work I do behind this Blog is to increase the “Blog Archive” (Asset) of this Blog only. Right now I am earning $ 5-6 per Month from This blog. If Suppose today I stop working than also I will continue making the same $ 5-6 from this site. Because the articles that I have already post on this Blog are valuable and they will continue attracting some basic average traffic on this blog for ever and that will generate a cash flow for me. But I am working on this Blog because I want to increase the size of the “Blog Archive” of this Blog so that it can attract and accommodate much more traffic and thus can generate much more Revenue for me…..
So Blog/Website Income is the passive Income.
Remember,
- If you want to be Rich, Financially Free and want to enjoy your life than you need to build a strong passive Income. Most of the time people struggle financially because they try to increase their active Income by taking higher education and doing overtime at their job places.
The Financial advises Start Savings & Investing Early, Invest in Retirement & Pension plans…etc are originated from the Concept of developing a passive Income. The more you develop passive income for you, the more you will be financially stable and the less you will have to depend on your job.
- Rich people are financially free because they have multiple streams of passive Income. Middle class people will always remain middle class no matter how much they earn because the main source of their Income is an Active Income. They have never developed a Passive Income.
- Personal Finance is all about developing multiple streams of Passive Income.
Part: 2 Expense (Good & Bad)
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s I have already told you that, All the Personal Finance, Business & Investment advises are originated from the various parts of the Financial Statement only and that's why it is important to learn the basics of the Financial Statement.
The 2nd Part if the Financial Statement is “Expense” Statement (A Part of an Income Statement).
Basically there are 2 types of Expenses. One is a Good Expense& Second is a Bad Expense. And Personal Finance is all about Reducing Bad Expenses & Increasing Good Expenses.
Good Expenses –> Any Asset producing Expense is known as a Good Expense. See the diagram. Any Expense that will produce an Asset (We will discuss all about Asset column in detail later on) at the end is known as a Good Expense. Such as Real Estate Mortgages, Student Loans, Educational Loans, Business loans, Business equipment loans…..etc….. Remember, Rich always do Good Expenses while poor and middle class always do Bad Expenses.
All the Personal Finance advises about Expenses are originated from here.
Bad Expenses –> Any Liability producing Expense is known as a Bad Expense. See the Diagram. Any expense that will produce a Liability (We will discuss all about liability column in detail later on) at the end is known as a Bad Expenses. Examples of Bad Expenses are Expensive Cars, Credit Cards, Shopping, Personal loans, Consumer Loans…etc….
The Best Personal Finance Advise, “Frugal Living” is originated from this part of the Financial Statement.
Most of the people of India have a false belief that, people who spend money behind Liabilities (Bad Expenses) Are Rich people and everyone else is a Middle class or poor. But the reality is exactly reverse. In reality, anyone who does Bad Expenses more is a Typical Middle class while anyone who does Good Expenses is a Rich.
So it is very important that you observe and analyze the types of expenses of anyone before you make a judgment in your mind about that person. Remember, Rich always do Good Expenses while poor and Middle class always do Bad Expenses.
If you want to be Rich in your life than always do Good Expenses (Asset producing) in your life. And stay away from Bad Expenses (Liability producing Expenses).
Part: 3 Asset Column – Everything about Growing your Asset Column
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he 3rd Part of the Financial Statement is “Asset Column”.This is the best and most interesting part of the Financial Knowledge. The Secret of becoming Rich is in this part of the Financial Statement. And personal Finance advises such as Start savings & Investing early, Invest for your retirement are originated from here.
Many Entrepreneurial advises such as create your own Business (Means create your own Asset) are originated from here.
Not only this but Con programs like Get rich quick, How to be rich, How to make Money Online are also originated from this part of the Financial Statement only.
So if you understand the Asset Column very well than, You will understand the Whole Mystery of Money and Getting Rich. Also read the “Related Articles” of this Post. You can’t understand the whole Mystery of Asset Column in one article only. Learning basics of Asset Column is fun and interesting. Believe me, You won’t get bored here…..
Remember, It is the “Asset Column” of anyone’s Financial Statement which is responsible for making that person Rich”.Most of the people around this world has a false belief that, if the Income is high, the person is Rich but this is a Myth. Income is not at all an indicator of your being a Rich. It’s the Assets. If anyone’s Asset Column is full of valuable Assets than he/she is known as a Rich.
So What is Asset?
Well, Asset means anything which is likely to appreciate in future as well as it may(or may not) provide you cash flow at present. In Simple words, Asset is something which will put money into your pocket. So anything which is likely to appreciate in its value in future as well as provide you a steady cash flow is an Asset.
Examples of Assets – Stocks, Bonds, Gold, Real Estate, Businesses, Art, Intellectual properties, Rental properties, Blogs, Websites, ….etc….
What you should do with your Asset Column to be Rich?
Well, you have to Grow it. Remember, Rich people focus on growing Asset Column of their Financial Statement. The more you grow your Asset Column, the more you will be Rich, Super-rich.Growing an Asset Column is the key of Financial Success, Secret or path of being Rich and Wealthy or whatever you want to call it.
You can not grow your Asset column in one night or in one weekend or in one year. Growing an Asset Column takes a time, a long time and sometimes decades………..
If today, some person is Rich (Means having a vibrant Asset Column) than it means that in past that person has struggle a lot behind growing his Asset Column. Growing an Asset column is not an easy task. It requires lots of thinking, motivation and lots of hard work……. But it’s worth it…..
So How can you grow your Asset Column?
You can grow your Asset Column by 3 ways. Acquiring, Converting & Creating Assets.
01) By acquiring Assets – You can simply acquire assets out of your money such as stocks, bonds, gold, real estates, art…etc…. This is the commonest way of growing your Asset column. You don’t have to use your brain much in this way.
02) Convert something into Asset – You can convert something into cash flow producing asset. You have to use a little bit of your brain behind converting something into an Asset. Say for example, if you are an avid book reader and you have a collection of books at your home that you have already read than you can give these books on rent to other people. So now your books are your assets because they are generating cash flow for you.
03) Create Assets – This is the most exciting but most nerve wrecking exercise of your mind. If you want to grow your asset column very fast than you just have to create assets that millions of people want to buy. Take the Example of Dhirubhai Ambani, The founder of Reliance Industries. Reliance Group is Dhirubhai’s Asset. And Dhirubhai has created it. And today the Reliance is publically listed and million of people want to buy shares of it.
Another Example is, “My Journey To Billionaire Club”. MJ2BC is my Asset and I have created this Asset out of my knowledge and investment of time only. I spend every single free hour of my day (almost 10-14 hours a day) behind developing this Asset (This Blog) and today after almost 10 months of Blogging, this blog has started providing me a fairly good income from Google AdSense. So this is how I have created my own Asset and put it into my Asset Column. And not only this but according to Technorati’s software, the Net Worth of this Blog is around US $ 2800 and that is roughly Rs.1.40 Lakhs. So if today I sell this blog than I can sell it as a fair price of Rs.1.40 lakhs. So withing 10 months I have created an Asset (This Blog) worth Rs.1.40 Lakhs today out of investing my Time only.
Creating your own Asset is most exciting, nerve wrecking and a mind game. It requires a lot of hard work but its fun, exciting and worth it. Middle class people call it Risky. But if you know exactly what you are doing than it is not risky. Take the Example of this Blog. When I have started this Blog, my so many friend had told me that This is risky because there are 110+ Millions Blogs in the Blog sphere. And out of them there are literally hundreds of thousands of Personal Finance Blogs. Than who will read your Blog? There is a too much competition out there. But I knew that I was creating an Asset and Personal Finance is my PASSION so I never feel it risky to start and run this Blog. Instead I am enjoying watching this Asset (This Blog) grow right now (Both in Revenue and Valuation). And watching your own Asset growing is a Fund and Exciting……….It’s not risky……!!!!!!!!
So I also want you to do the same. Grow your Asset column and watch it grow……….
Part: 4 Liability Column – Everything about reducing your Liability
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The Part 4 of the Financial Statement is “Liability Column” (See Diagram). The Basic knowledge and understanding of the liability is very important to be Rich and Financially free.
Middle Class people are the ones who simply LOVE liabilities. They simply can’t live without liabilities. And their main focus in their life is to grow Liability Column to look cool and rich.
Rich are one who focus to reduce their liability column. Rich always stay away from new Liabilities. Rich Never buy Liabilities.
What it means by Liability?
Well, Liability is something which takes money away from your pocket. In Simple words Liability is something which makes you expenses as well as it will depreciate in its price over the time. Say for Example, A Car. A Newly bought car will lose more than 60% of its value within first few years of its buying. And not only this but it will make you expenses such as maintenance and all……
Examples of Liabilities are, Credit Cards, Personal Loans, Expensive Cars, Watches, Consumer Debts, Shopping, Club Memberships, Electronics, Mobile Phones, Consumer Debt….etc…
See the diagram. Diagram shows that, Middle class people buy Liabilities out of their Income. When ever they have a spare money on hand they simply go out and shop and buy one new liability and add it into their liability column. And one day when they get up in the morning, they find themselves in a deep debt (Liability) and from that day they can’t stop working.
The following Personal Finance advises have been originated from the Liability Column of the Financial Statement.
- Getting out of Debt
- Cut down all of your credit cards
- Stay away from Consumer Debt and Personal Loans
- Buy second hand cars
- Buy what you need and not what you want
- Don’t show off. Don’t try to look cool and rich by getting into debt……..etc…….
And not only this but the whole basic concept of Debt Reduction, Debt Consolidation, Debt Counseling and Financial Counseling is around the Liability Column of your Financial Statement.
The Logic behind all of the above principles and services such as Debt Consolidation/Debt counseling is around reducing your Liabilities in your Liability Column. If you can effectively reduce the liabilities in your liability column than you are Success……. All the Personal Finance advises and frugal living teaches you to stay away from New Liabilities as well as focus on reducing your existing Liabilities.
Reducing Liabilities on your Financial Statement is also a broad topic and demands so many articles to understand. But here the basic purpose of this Article is to give you brief Information about Liability Column and how it affects your Finance and How rich & every one else views and treat the Liability Column of their Financial Statement……….
12) Cashflow Versus Capital Gain
Most of the people don’t know the basic difference between the 2 words Cashflow & Capital Gains and that’s why they struggle Financially.
Meaning of the both of these 2 words is very important in the world of Money, Finance & Investing. We will discuss in detail today that what exactly it means by Cashflow & Capital Gains? And what are the Pros and Cons of investing for Cashflow & Capital Gain.
What is Capital Gain? – Pros & Cons -
In Simple words, Capital Gain means “the amount by which the selling price of an asset exceeds the purchase price; the gain is realized when the asset is sold
In other words, “Capital Gain is profit earned from the sale of an asset.”
Say for Example Stocks. Suppose you buy The Stocks of Company XYZ worth of Rs.1,00,000 today. And keep these stocks for 10 years in your Demat Account. Now after 10 years, the share price of Company XYZ appreciates by 10 times thus your 1 Lakh rupees investment becomes Rs.1,00,00,000 (1 Crore). So 1,00,00,000 – 1,00,000 = Rs. 99,00,000 (99 Lakhs) is your Capital Gain.
This applies for any Asset such as Stocks, Bonds, Gold, Real Estate, Art, Businesses, Websites, Blogs, Rare items or any other Assets on this world.
The main advantage of Capital Gain is that, it is really a Huge one in comparison with Cashflow. If you own some Asset for 10 years than you will have such a huge Capital Gain that you can retire with that much amount of Capital Gain.
The main Disadvantage of Capital Gain is that, Most of the time of your life it is “On paper” only. So the Capital Gain doesn’t realize until you sell your Asset. Say for Example, you may own a Home worth of US $ 1 Million. But you don’t have $ 10,000 to spend in your pocket. This is called Asset Rich but Cash Poor.
Many people around this world are Asset Rich but Cash poor because of the Capital Gains. The Capital Gains remain “On Paper” Only until you sell your Asset.
Investing for Capital Gain – When you Invest in Stocks, Bonds & Mutual Funds…. You are Investing for Capital Gains. When you Invest in Real Estate which doesn’t give you any Income, you are Investing for Capital Gains.
What is Cashflow? – Pros & Cons -
In Simple words, Cashflow means “Cash flow refers to the movement of cash into or out of a business, a project, or a financial product
In other words, Cashflow = Income – Expense. Means anything that remains after deducting the expenses from the Income is a Cashflow.
The main advantage of Cashflow is that, as long as you hold any Asset, you will benefited by handsome Cashflow. Say for Example, This Blog. This Blog is my Internet Business & Asset. The main advantage of holding this Asset is that, as long as I will hold this Asset, I will get steady Cashflow which I can spend to enjoy my life unlike holding the Capital Gain Assets such as Stocks & Mutual Funds.
Suppose if I have $ 5000 in my pocket and I invest it in buying an Internet Business than I can enjoy both Cashflow & Capital Gains. Because that Internet Business will give me $ 300-500 Monthly Cash flow that I can enjoy as long as I hold the Asset. Plus when I sell the Asset, I will be benefited by Huge Capital Gains.
Now Suppose I invest same $ 5000 in Stocks or Mutual Funds, than I have to follow the Buy, Hold & Pray Strategy. Means I may realize a Huge Capital gains in future after 10 years but for that 10 years, I won’t have any Cashflow to enjoy my life.
Rich People Invest for Cashflow (+ Capital Gains Both) while Middle Class People Invest for Capital Gains -
Cashflow + Capital Gain Investments –>
01) Businesses (Offline & Online)
02) Real Estate (Rental Properties)
Only Capital Gain Investments –>
01) Stocks
02) Bonds
03) Gold
04) Mutual Funds
05) Real Estate Without Income (Non-Rental Properties)
All the Middle Class people Invest for Capital Gains while Rich Invest for Cashflow and that’s why Rich can enjoy their life like anything while Middle Class simply can’t…!!!!!
13) Invest for Cash flow
Most of the people struggle financially & remain poor and middle class because they don’t invest for Cashflow. All the Middle Class people invest for Capital Gains and that’s why they remain middle class only.
While Rich people invest mainly for Cashflow. Rich always ask for ROI – Return on Investments. If you don’t know the Basic Difference between the Cashflow & Capital Gains than read the above chapter.
The main aim behind investing for Cashflow is to generate Passive Income from your Assets. The main Goal behind Cashflow is Simple – “to build a passive income from real estate deals and business investments that is 1X to 2X your living expenses, at that point you escape the “rat race” and move on to the “fast track” where you can build your business empire and do lots of cool stuff.
Take the Example of “My Journey To Billionaire Club”.
MJ2BC is my Internet Business. I am investing my Money & Time both behind this Internet Business for Cashflow & not only for Capital Gains. What the most of the people do on the Internet? Well, they do Website/Blog/Domain Flipping to make huge bugs.
Of course, they succeed but to maintain that level of Income, they have to work very hard whole of their life until they die. They have to flip those websites, Blogs & Domains several times a year to earn 6 figure Income but at the end, they don’t have any possession over any Asset.
But instead, if you invest your time & money behind developing some Cashflow generating Asset (Such as This Blog) than you will have a nice and steady passive Income for whole of your life and thus you will be able to do lots of cool stuff in your life.
Most of the people Invest for Capital Gains means they follow the single formula - “BUY, HOLD & PRAY.”
Capital Gain Investments -
01) Stocks
02) Bonds
03) Gold
04) Mutual Funds
05) Real Estate without any Income (Non-Rental Properties)
06) Retirement Plans
07) Savings Accounts
08) Fixed Deposits
09) Pension Plans
10) PPF (Public Provident Fund)
11) ULIPs (Unit Linked Insurance Products)
12) EPF (Employees Provident Fund)
Cashflow Investments -
01) Businesses (Offline & Online)
02) Real Estate (Rental Properties which produce positive Cashflow)
03) Internet Assets: Websites, Blogs, Forums, Internet Businesses which produce steady Google AdSense, Amazon/eBay Affiliate & Click Bank Income.
Smart (Rich) people Invest in Cashflow Investments while everyone else invest in Capital gain Investments. In fact, most of the Financial Products available in the market are based on Capital Gains.
I have seen several people who have hold stocks of Some reputed companies for most of their lives without enjoying their lives. I have also seen several people who have bought a piece of Real Estate (Non Income Producing) and hold it for decades hoping that one day the prize will go up.
These people are invest for Capital Gains and that’s why most of the part of their life they have to Hold that Investment without having any Passive Income. While Rich people invest for Cashflow since early life and that’s why they have around 10X Passive Income (Cashflow) than their expenses and thus they enjoy the life most.
So now you decide yourself that, weather you want to invest for Capital Gains or Cash flow?

14) What is Stock?
What is Stock: Definition & Examples of Stocks
Well, here are few definitions of the stock.
Stock is ownership in a company. The most popular types are common stock and preferred stock.
- the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity); "he owns a controlling share of the company's stock"
Now, let us discuss in the layman’s language that what is stock? Just imagine for a while that you are the owner of a Business and you cut down your business in to small pieces of equal size and you say each piece a Share(Stock). Now, you retain 51% of pieces of the business with you (Yes, The Smart Business owner will do this so he can fire CEO also) and than sell rest of the 49% pieces to the Investors and public. In this way, by selling the partial ownership of your Business, you will raise capital for your business expansion and growth as well as retain control over the Business.
Thus, the stock is not just a piece of paper or a ticker symbol only but it’s a piece of some Business. A Stock represents the ownership interest in the company.
Say for Example, if you own few shares of Reliance than it means that, you are the owner of that much part of the Business. If you own shares of Google or Microsoft than it means that, you are the part of the owner of those Giant Businesses.
Unfortunately, most of the people in this world treat the stock as a piece of paper only and that’s why most if them can’t make fortunes out of it. But great investors like Warren Buffet, treat buying stocks as they are buying the ownership in the Business.
Do you know that, the ownership of world’s greatest Businesses are selling daily on the stock market but how many of you really buy the ownership of those Businesses? Not Many…. Am I Right?
All of us have a chance to become a part of the owner of world’s greatest Businesses (By buying Stocks of these Businesses) But very few from us save money to buy stocks and that’s why most of the people remain middle class and live paycheck to paycheck and those who own a piece of great Businesses, make fortunes out of it…!!!!
15)Difference Between Equity & Debt
What is the Basic difference between Equity & Debt? This is the question of basics of Financial Literacy. Many people invest (I am sorry, In reality they are Speculate) in the stock market and buy the shares but they don’t know that, What is Equity and What is Debt?
This article will teach you in Layman’s language that, what it means by equity and debt and what is the difference between them?
Well, Equity means Shares or the piece of the ownership of a Company. Say for Example, for a while imagine that, you own a business. Now you divide this business into several pieces of equal size and retain 51% pieces (Shares) with you and sell rest of the pieces to the others. These pieces are known as Equity or Shares or Common Stocks. They represent the ownership interest in the company.
Suppose if you own 100 Shares of Google than it means that, you are the owner of that much part of the Business. This is Equity. It is the ownership of the underlying Business/Company.
Now, Debt means when a Company/Business borrows money from the Bank, Financial Institutes or public, it issues a certificate to the lender (Bank, Public or Financial Institution). This certificate is a Debt Paper. And Investors invest in Debt Papers. Sometimes Investors invest in company (By Buying stocks of the Company) while sometimes investors lend money to the Company (By buying its Debt Paper).
So whenever you buy Equity of some Business, it means that you invest your money in that Business and whenever you buy a Debt Paper of any Business it means that you are lending your money to that Business. In other words, that Business is borrowing money from you to expand and will pay you interest on your money.
Now, Whenever government goes into Debt and borrow money from the Investors and people, this Debt Paper is known as Bond. Say for Example, US Treasury Bonds, GOI (Government of India) Bonds…etc…
16) Sweat Equity Shares
weat Equity Shares

You must have heard the word ‘Sweat Equity Shares”. Now, let us discuss that what it means by sweat equity shares and why it is useful?

Well, in simple words Sweat equity means during the startup phase of the company founders and key employees work hard to develop a Business. And during the initial period of the company, when the company is not in any profit or positive cashflow, it is impossible to give high salaries to its founders and employees for their hours and hours of mind and physical labour work.

So instead of giving salaries and bonus money, the founders issue the shares of the copany to themselves and the employees during initial period. This is known as Sweat Equity. Means you are not getting money here but you are receiving shares instead.

In India, the concept of SWEAT EQUITY SHARES was started by Infosys.Sweat Equity Shares are given to the employees at a discounted rate of market value.The whole idea behind giving Sweat Equity is to make the employee feel that he/she is a part owner in the company.When employees feel their company has their own funds invested in it, they get better motivated and work more earnestly towards company's progress.

Sweat equity shares are the ones given to the employees / people who have been largely involved in building the company from scratch. They do not put any money in the business, but are given the shares as a reward.

Sweat Equity are the shares that are mainly issued to the founders of the company who have developed the Business from Scratch. This is the reward of the risk and time that they have taken in developing a successful Business out of Scratch.
17) What is an Asset?
What is an Asset?

Most of the people struggle financially because they don’t understand the basic difference between the words Assets & Liabilities. Let us today understand that What is Asset and Why is it so important in being Rich & Financially Free.

In Layman’s language, Asset is something which is likely to appreciate in future (Capital Gains) and/or gives you a regular Income (Cashflow). In short, Asset is something which puts money into your pocket.

See the above line diagram. On your Financial Statement, There is a Balance sheet which has the Asset Column and a Liability Column. Asset is a thing that can give you a passive income. A Passive Income is one to earn which you have to do one time hard work only and after that that income flows into your pocket for the rest of your life weather you work or not?

Examples of Assets are Stocks, Bonds, Gold, Real Estate, Mutual Funds, Art, Web Properties, Businesses, Intellectual Properties, and anything else which puts money into your pocket.

While the examples of Passive Income are Dividend Income, Interest Income, Rental Income, Business Income, Royalties, Online Income, Capital Gains…etc…

Rich always focus on growing their Asset Column of the financial statement and that’s why they become and stay rich. While everyone else mainly focuses on growing their Income and that’s why they struggle financially.

Remember, if you want to become rich than you have to grow your Assets. You have to focus only ine one thing if you want to become rich and financially free and that is Assets.