Starting Gate - Where are you now in your Financial Life?

You're at the starting gate of your real estate investing career. You've made the choice to make money in real estate. You've got your Financial Matters handled. So now what?

It's time to analyze where you are at financially right now. The universally accepted method for doing this is to prepare a Profit & Loss Statement. Some of you may not be familiar with a p & l, others of you may have thought they were only used for big corporations. But as any successful and wealthy person will tell you, everybody needs to have a p & l, even if it's just for you as an individual. This is especially important for you as you begin your investing career.

A p & l keeps you honest. It keeps you focused. It keeps you challenged. It gives you a sense of direction. At the starting gate of your new business, all of these things are going to be necessary to make sure you know what your options are and what items need to go on your to-do list.

So how do you prepare a p & l. It's actually quite simple. The p & l is comprised of two sections:

Balance Sheet - The balance sheet shows your assets on one side (what you own), and your liabilities on the other side (what you owe). Sometimes you see over/under p & l's also, where the assets are on the top of the page and the liabilities on the bottom. It doesn't really matter, use whichever method you like best. Excel or Quicken are two great software programs that will allow you to create a p & l easily, or you can always hire a CPA or bookkeeper to do it for you.

Assets-Write down everything that you own (even if there is a loan on it) and the present day fair market value of each item as closely as you can approximate - houses(s), cars, jewelry, stocks, bonds, mutual funds, annuities, investment properties, etc.

Liabilities-Now write down everything that you owe. Include mortgages on any homes, auto loans, credit card balances, notes payable, student loans, medical bills, timeshares, etc.

Add your Assets column and your Liabilities column and subtract - if you own more than you owe, then you have a positive Net Worth. If you owe more than you own, then you will see a negative number, which means you have a negative Net Worth. Don't be upset if it's negative. Remember, this is your starting gate - you'll soon be working to make all of these numbers stronger and stronger, so that one day you have the Net Worth of your dreams. Many successful real estate investors have started with horrible negative net worths, and now they are multi-millionaires!

Income Statement - The income statement is a record of the revenue or income you receive, subtracted from the money you spend or your expenses, to arrive at a profit or loss. Usually p & l's are done on a monthly basis, so that you can keep a close eye on your expenditures and make corrections as necessary quickly, instead of waiting until you're in trouble and it's too late.

Tracking your Income is usually very straightforward. Any money you receive is income, i.e. your paycheck (if you're a W-2 employee), a distribution check (if you own a company), proceeds from any IRA's, stocks, rental income, etc. In other words, anything you deposit into your bank account is usually a source of income.

Tracking your Expenses on the other hand, is something that most people find almost impossible to do. But everyone should try to do this personally for at least a year. It will become very clear to you what areas you are spending your money in that perhaps could be shifted to one of your Savings Plans. If you own a company, then you'll need to get in the habit of having a p & l prepared a minimum of every quarter by your CPA. No successful business owner can afford not to do this.

Subtracting your Total Income from your Total Expenses shows whether you have a monthly or quarterly profit or loss. If you show a loss, try to identify what areas you can cut back in immediately. The term "in the red" refers to the situation of showing a loss. You always want to be "in the black", which means you're making a profit. Knowing at the starting gate whether you are in the black or red will give you an idea of what action steps you'll need to take to either strengthen your position or begin improving upon it.

Being armed with this knowledge at the starting gate enables you to know where you are strong, what areas need improvement, and you should see a plan developing in your mind of where you want to be going.