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Robert Kiyosaki, popular author of Rich Dad, Poor Dad and successful entrepreneur, has been strongly recommending people to be mindful of their income statement. But what is it? And how exactly can it help you?
An income statement is a tool of personal financial planning. It is where you see a record of your income and the things that you are spending on.
In financial planning seminars that I have conducted, I am again surprise that most of us Pinoy don’t know what an income statement is or how to make and use one.
Simply, it is:
Income – Expenses = Surplus / Deficit Cash flow
Cash flow: The purpose of an income statement
And you might have already guessed it. The purpose of an income statement is to show your cash flow. Cash flow is a way to illustrate how much money you are earning, spending and what’s left of it after your expenses.
Deficit/Negative cash flow
If your expenses are more than your income, then you have a deficit or a negative cash flow. Your income is drained by your expenses. You have nothing left for savings, and are likely to take on more debts making you vulnerable financially.
Neither Negative/Positive Cash flow
If your expenses is equal to your income, then you have neither a surplus or a deficit. While you have no need to take on debts as your income is adequate for your expenses, you spend every single peso you earn. That will still leave you with zero savings.
You are financially vulnerable too to emergencies, situations that are stressful and costly, such as critical illness, job loss, and hospitalization. With no savings to catch you as your safety net, you are again likely to either sell your valuable belongings and properties and worse, even take on huge debts.
The ideal is to have a surplus or positive cashflow. Your income is not spent entirely for your expenses, and you are left with a surplus. This is what’s recommended in personal finance.
A surplus, or whatever is left of your income after all of your spending, is your savings. And you can use this to either fund your financial goals or make it work for you through investing.
You are also in a better position to be protected from life’s uncertainties, like emergencies and untimely death. With your spare cash, you are able to buy sufficient insurance cover and other forms of income protection.
Income statement worksheet: How to get started
You can use my Income Statement by downloading it for free! Fill out the tables for income and expenses, and it automatically computes your resulting cash flow. It will also indicate if you have surplus or deficit from the result.
You will notice that I didn’t itemize each of your possible expenditures. This is so for the reason that I’m planning to write a separate post on ‘Daily Living Expenses’. What you can do for the moment is to guess the best way you can on your expenses through past receipts, bills, looking up the prices of comparable items online and other such records.
Income statement as a tool
As I have already discussed, knowing where you are at right now by understanding your financial status is the first step toward a meaningful personal financial plan. An income statement is a tool that quickly works out if you have been spending more than you earn.
Your income statement can reveal many things about you, including
- your spending habit
- your ability to save, or lack of it
- ways of earning your money and even more ways to spend it
- your ability to fund for your medium- to long-term goals
As a tool, it is best paired with action. What you will do after you have made sense of your income and expenditures is what is going to spell your success in achieving financial freedom.
What I suggest, and this is really how this worksheet is designed, is to use this with other tools such as Financial Goal worksheet. In that way, you can check whether your dreams are included with your monthly income.