Understand Your Financial Position With a Personal Income Statement

In business, an income statement shows a company’s revenues and expenses during a certain period. By crunching these numbers, businesses can analyze their net income, measuring their profitability.

What if you could apply these same concepts to your personal finances? We’ll explain how to do just that.

In this article, we’ll teach you everything you need to know about personal income statements. We’ll specifically cover:

• What they are

• How you can use them to understand your financial position better

• How you can go about setting them up

By the end of this article, you should have a better idea of how you can implement income statements into your financial management strategy.

What is a personal income statement?

A personal income statement shows the inflows and outflows of money from an account. If you have more coming in than you’re spending, you’ll have a net profit and a net loss if you have more money going out than you’re bringing in.

The personal income statement measures your inflows and outflows over time. You can set up your personal income statement any way you’d like, and two of the most popular options are monthly and quarterly. 

For instance, if you’re using a monthly statement, you’ll track your monthly income versus monthly expenses. In the sections below, we’ll go more in-depth on ways to set up a personal income statement.

Personal income statements help you track spending. Your goal should be a positive cash flow. If you have a negative cash flow, figure out why. 

If you can’t cut back on any expenses, do you need to find another source of income? What your personal income statement ends up showing could lead you to do something like implement a budget or take on a side hustle.

How can income statements help you understand your financial position?

Income statements are a tool to help you better understand your financial position. If you have a net profit, you have cash available to do things like:

• Pay down debt from credit cards, student loans, personal loans, automobiles and mortgages

• Build emergency reserves in a savings account

• Fund your retirement accounts and IRAs

• Purchase a rental property that you can use as a source of real estate income

On the contrary, if you have a net loss, you may have to tap into a savings fund or borrow money to pay expenses. While this may happen occasionally — rainy day and emergency funds exist for a reason, after all — it’s problematic if it occurs routinely. Having a net loss for a few periods in a row may result in debt, which can become difficult to repay because of interest.

Thus, income statements are useful because they offer a snapshot of your personal financial situation and cash flow over a period. They can help you identify trends and patterns that eventually lead to bigger issues.

It’s worth noting that your income statement — and, specifically, whether you have a net profit or net loss — is different from your net worth. Your net worth measures your total assets and total liabilities against each other. You obtain your net worth by analyzing your personal balance sheet. Using the income statement and balance sheet together helps measure your financial health.

In general, there are four scenarios that your income statement and balance sheet will yield:

• Positive cash flow (net profit), positive net worth

• Positive cash flow, negative net worth

• Negative cash flow, positive net worth

• Negative cash flow, negative net worth

You should strive to have a positive cash flow and a positive net worth. On the other hand, a negative cash flow and a negative net worth is the worst scenario that you can find yourself in.

Having a positive cash flow can help get you on track if you have a negative net worth. You can use your excess income to pay down debt and work toward achieving a positive net worth.

For instance, let’s say that your salary plus themoney you earn from a side hustle yields a net profit of $300 monthly. On the other hand, you have minimal money in savings, a new car loan and credit card debt. Your net worth is negative $5,000. You can use your $300 per month to pay down credit card debt or accelerate your car payment to help work toward a positive net worth.

The greater your net worth, the more likely you are to be financially stable. A positive net worth offers flexibility to work toward your financial goals. If you want to obtain and maintain a positive net worth, you’ll need to have a positive cash flow. The personal income statement can be useful.

Lastly, when you use your income statement and balance sheet together, you can better picture your overall financial situation.

How can you set up your personal income statement?

To set up your personal income statement, define the period you want to analyze. If you’re someone who needs to monitor spending or is working toward a specific goal, you may consider producing a monthly statement. If you have a history of positive cash flows and net worth, you may only need to look at your statement quarterly or annually. For the sake of discussion, let’s assume you choose a monthly personal income statement. 

Next, you’ll want to choose the tools to record the information. Some people prefer the pen-and-paper method, while others would rather use a spreadsheet. You may even be able to find an income statement template online. If you take this route, try to find one for personal finances and not for small business owners, as the categories listed may not apply to you.

Ultimately, it comes down to a matter of personal preference. The more comfortable you are with your income statement, the more likely you are to use it.

Once you’ve determined this, list your sources of income and the total amount of money you have coming in. This will likely include your salary or hourly wages and any other income you have from a side hustle, Social Security, alimony or child support payments.

It could also include any passive investment income you have, like those derived from dividends, but only if you plan to use that money as part of your monthly income. If you’re going to reinvest it, don’t include it as a source of income. Instead, it’ll appear as an asset on your balance sheet.

Once you figure out your monthly income, record your monthly household expenses/living expenses. These are expenses that you can reasonably anticipate, including:

• Rent or mortgage payments

• Car payments

• Loan payments

• Minimum required credit card payments

• Gas or other travel expenses

• Internet and cable

• Groceries

• Daycare

• Child support and alimony

• Health insurance payments

• Life insurance payments

• Subscriptions

Let’s say that it’s April 1 and you’re setting up your income statement. Go through your bank and credit card statements for March and determine how much you spent for each one of these categories.

This brings up one of the potential downsides of a personal income statement. Income statements are reactionary, meaning that they only show past data. You can use this data to identify future deficiencies and create a budget. If your expenses are relatively routine, you can reasonably predict future cash flows.

As an example, let’s consider the following cash flow. 

Income sources include: 

• Monthly net income from a full-time job: $3,000

• Monthly side hustle income: $500

Expenses include: 

• Monthly rent payment: $1,000

• Monthly car payment: $250

• Monthly loan payment: $250

• Required monthly credit card payment: $50

• Monthly transportation expenses: $300

• Monthly internet and cable expenses: $50

• Monthly grocery expenses: $550

• Monthly subscriptions: $50

In this scenario, the monthly income is $3,500. The monthly expenses are $2,500. The net profit is $1,000 per month.

A personal income statement can help with financial management

If you’re hoping to understand your finances better, you may consider using a personal income statement. It allows you to track your income versus your expenses over time. Doing so helps you monitor and improve your personal finances and can help with future financial planning.

Your personal income statement may yield a negative net income. While it’s understandable that this may happen every once in a while, it shouldn’t be a recurring theme.

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