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Develop a Personal Income Statement and Use It to Analyze Your Spending

A personal income statement is like a financial motion picture of your cash inflows and outflows. This type of statement is based entirely on actual cash flows, not accruals.  An example of an income statement is found in Chart 6: Income Statement Example. If the statement looks familiar, it is because the income statement is just the middle column of your budget.

Chart 6. Income Statement Example


Income: Cash Inflows

Income includes things such as wages, tips, royalties, salaries, and commissions. Income is the amount you earn, which is not necessarily equal to the amount you receive. This is because some expenses, such as taxes, health-care costs, 401(k) contributions, and so on, are deducted from your check before you receive it.

Expenditures: Cash Outflows

There are two main types of expenses, fixed and variable. Fixed expenses are expenses that you don't directly control and that you usually pay monthly or semiannually, such as a mortgage payment, rent, tuition, and books.

On the other hand, variable expenses are expenses that you have control over, such as food, fuel, entertainment, clothing, utilities bills (to a degree), and cable TV.

There may be differences of opinion concerning what constitutes a fixed versus a variable expense. For example, while one spouse might consider dates each weekend a fixed expense, another might consider it a variable expense. Be careful that variable expenses are not considered fixed expenses. Realize also that most fixed expenses are variable over longer periods of time; for example, you can buy a smaller house or get by with a used, instead of new, car.

Using Ratios to Analyze Your Spending

Once you have completed your personal balance sheet and your personal income statement, determine how your financial statements can answer the following questions:

  1. Do I have adequate liquidity in case of emergency?
  2. Can I meet my debt obligations?
  3. Am I saving as much as I think I am?

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