Manage personal income and expenses
Money management begins with recording and analyzing cash flow. Personal income statements detail cash flow and help to build budgets that work. Learn to use a personal income statement to your advantage and build a financial plan unique to you.
What’s a personal income statement? What benefit does it offer for financial management? I’ll answer these questions and use my income statement as an example to help you create your own.
What’s an income statement?
An income statement details and compares an entity’s earnings to its spending. Businesses use that information to determine their largest revenue streams and expenses. This helps owners cut spending and find profitable opportunities.
Treating personal finances like a business is the first step to financial freedom.
Personal income statements divide expenses and revenue into categories. Gaining a bird’s-eye view of coffee spending for the entire month can be an eye-opener. Likewise, those that compare income statements to previous months often reduce future expenses.
Comparing income statements to previous months finds the average cost of living. This information offers a benchmark, helping people determine their financial trajectory.
After seeing this information, many cut down on trips to the café as well as make efforts to improve income.
Millionaires live below their means
Personal income statements make it easy to build a budget that fits your standard of living.
This helps develop a money-saving mentality.
Information from earlier spending influences a budget plan. The best strategies reduce unnecessary cost and increase investing and saving efforts.
How to create an income statement
Creating your income statement is simple. The first step is to determine earnings. Leave out investments unless stock trading is a major source of income.
Earnings come from a full-time job, a part-time job, a side hustle, an internet business, a blog and other financial venture.
Second, catalog and categorize expenses into a table. Categories break expenses down into fixed liabilities, fluctuating expenses and luxuries. Expenses that fall under fixed liabilities include rent, car payments, or student loans. Fluctuating expenses can be things like food or gas. Luxuries range anywhere from buying clothes to going out to restaurants.
Last, income statements add these numbers up to leave a net income. This number determines an entity’s financial trajectory. Positive numbers show a positive financial trajectory. Negative numbers represent an entity falling into debt.
My financial documents from 2017
A balance sheet shows an entity’s worth at given time. I was in debt for 2017 and went into 2018 with debt. I was on pace for reducing my debt, until May where I took on more debt.
I bought my laptop and moved out of my parent’s house, taking on many financial responsibilities that hindered momentum. Since then, I haven’t been able to save as much money as I’d like to have, but this is life. I have to deal with living on my own while paying down debt.
I collected more debt until December of last year where I earned an extra paycheck for the month—a lucky break. My balance sheet shows where I struggled and where I thrived at a glance. I’ll discuss more on balance sheets in a future post.
Last year, I only had one consistent money stream from my full-time job as a content writer. This year, I plan to develop a second revenue stream and increase my major source of income.
With more revenue streams, I’ll increase my income and improve my personal income statements. Monitoring revenue and expenses month after month will guide me to cutting back on unnecessary expenses while making greater efforts to improving my income.
Do you have a savings plan for 2018? How did you figure this out? What documents did you use to plan your financial future?