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Don’t you love the idea of being able to go to a single document to quickly see where your money is going? I know you are probably thinking, “There’s no way I want to see how much money I’m spending, let alone see that my income does not cover my expenses!”  But trust me, preparing and analyzing your personal income statement at least once a month will give you visibility into expenses that are more wants than needs. It will also open your eyes to the fact that maybe this is not the right time to lease that nice car on your wish-list.

I began preparing my personal income statement when I was 19. Since then, I have played with multiple versions and although I’m not sure I have mastered the skill of staying within my personal budget, I sure know where my money goes and where it should not.

Here are my 5 quick and easy steps to preparing a personal income statement and use it effectively.
1.    Choose or create a template. You can create your own personal income statement template using Excel or look for a free version online. Some factors to consider when making your pick are: which formulas you feel comfortable working with, how income and expense categories are grouped, and the overall aesthetics of the template. Whichever option you decide to go with, make sure it’s flexible enough so that modifications can be made easily as your financial situation changes.

2.    Define your style. Customize your income statement template to the format you think will give you the visibility you need and help you accomplish your money management objectives. I like to get a clear picture of how I’m spending my money and as a result, use quite a detailed worksheet. I separate my expenses into very specific categories. For example, I show my tuition expenses on a per-child basis rather than combined, and have lines for beauty products and dining out.  You can list all sources of income individually, gross or net of income taxes. This is a matter of preference, just keep in mind that some contributions to retirement plans are made before taxes.  If you want to show your retirement plan contributions in your income statement, you may want to start with gross income. Finally, don’t forget the bottom line.  You will need to ensure you have a formula that shows your total income less total expenses. This is where you will be able to see if you are spending within the limits of your income.

3.    Show budget and actual amounts.  This can be easily accomplished by adding a column to your template for budgeted expenses, in addition to the standard column for actuals.  While you are at it, add a column to calculate the difference between actuals and budget. At the beginning of each month, fill in your budgeted amounts and if you want to get really serious about this monitoring-your-spending business, you can use your budgeted numbers throughout the month to keep you on track and prevent over spending.  At the end of the month, when you add your actual figures, you will see where you spent more than planned. Easy, right?

4.    Expose those credit card purchases! Ok. This is where it gets tricky. I have seen personal income statements where some of the expense items are labeled credit card payments. What’s wrong with this? Unless you are paying your credit card balances in full each month, listing credit card payments as an expense item in your income statement may cause your expenses to look much lower than they really are.  I’ve found the most effective way to show credit card expenses is by having a section for credit card transactions with purchases categorized by type, offset by your credit card payments. The net credit card activity is then part of your income statement and your net income calculation.  You can get fancy and break out how much of your expenses came from financed purchases versus those paid with income during the month.

5.    Understand your numbers.  I know you will end up with a very nice looking income statement, but there is no use for it if you don’t analyze what the numbers are telling you.  How much are you spending in coffee each month?  Are your car lease payments too high?  Are you putting any money aside for additional savings or your emergency fund?  These are all questions you can get answers to by reviewing your personal income statement. Once you have the answers you are looking for, it’s time to take action.  How you do that will be the topic for another article. In the meantime, start working on the basics and slowly work your way to great money management habits.

Download our free Personal Income Statement Template, and start monitoring your expenses!