This article is part of our series about financial literacy. You can find the links to the other articles at the bottom of the article.
A personal income statement is a personal financial statement that outlines your income and expenses over a certain period of time, giving you some insight into your financial position.
With this personal financial statement, you can easily know your financial situation and your net cash flow (either negative cash flow or positive cash flow/ gross profit).
This personal financial statement makes it easier for you to improve your spending habits.
While this personal financial statement can be created monthly or quarterly, a monthly financial statement is more effective in tracking your cash flow than the personal financial statement that’s created quarterly.
A personal income financial statement lists income from various sources (salaries, dividends, and profits from bonds or stocks). This personal financial statement also contains all the living expenses that you might incur over time such as rent, utility payments, and mortgage payments.
Components of a Personal Income Statement
Income is the amount of money that you get from offering labor services or from investing a certain amount of money in profitable assets.
Here are the different types of income that should be included in this personal income financial statement:
Earned income is the amount of money that you earn as an employee for offering certain services. In most instances, earned income is paid through a paycheck or cash.
Earned income is paid for the value that you offer or create by providing your services. Examples of earned income include tips, salaries, wages, commissions, and bonuses. This type of income can be earned from a corporate job or a self-employment job.
While this type of income is quite consistent, it is subjected to different types of taxes such as state, federal, and social security taxes.
Portfolio income is the amount of money that you get from your investment asset.
As Robert Kiyosaki puts it; this is the type of money that works for you.
Income from stocks, dividends, bonds, and capital gains is categorized as portfolio income.
Unlike earned income, portfolio income is subjected to fewer taxes. For instance, medicare and social security taxes cannot be deducted from portfolio income.
While you can accumulate a lot of wealth from this type of income, you have to do some deep research before you invest your money.
Passive income is the money that you earn with minimal effort from the resources that you have invested in. It might take a long period for the asset to start generating a steady income. However, once it starts to generate profits, you won’t have to work for long hours to earn money.
Examples of passive income include music royalties, owner’s equity, interest from savings accounts, and rent from your personal properties. If you also have a partnership in a certain business, it might serve as a source of passive income.
Expenses are services, products, and other utilities that you pay for over time from your disposable income.
Fixed expenses are expenses that you might incur after a fixed period of time; monthly or weekly. Not to mention, most have a due date. Here are examples of fixed expenses:
- Utility bills (electricity, water, and cable)
- Health insurance
- Car insurance
- Vehicle loan payment
- Life insurance
The amount of money that you pay may change slightly from time to time, especially when it comes to utility bills.
However, the duration of time between bills remains the same.
Variable expenses are the expenses that vary, depending on the usage of a certain product/service.
For example, if you increase the frequency of your car trips, you might spend more money on a variable expense like fuel. Similarly, if you are hosting your friends at your home, you might spend more money on food and drinks.
Clearly, the cost of variable expenses can increase or decrease drastically after a week or a month. Here are other examples of variable expenses:
- Shoes and clothes
- Recreational activities
- Parking fees
- Books and magazines
- Transportation costs
These are non-essential expenses that you might incur over a certain period. Discretionary expenses are classified as ‘wants’, not ‘needs’.
For instance, if you get the latest smartphone model while you have another phone, such an expense can be classified as a discretionary expense.
Examples of discretionary expenses include:
- Entertainment costs
- Video games
- Streaming services
How To Prepare A Personal Income Statement
1. Determine the Amount of Money that You Get From Various Resources
Start off by determining the amount of money that you earn from various sources. If you have a regular source of earned income, input the total amount of money that you earn from that source in the sheet. Add the amount of money that you get once income taxes are deducted from your gross salary.
You can also add the bonuses and tips that you might have been paid while working. If you own stocks in a certain company, calculate the amount of dividend payouts that you get from such stocks.
Afterwards, determine the total amount of rent that you get from different properties, then add the rent to the financial statement sheet. You should also input the profits that make from your business revenue/operating income.
If you are planning to add a large amount of money (money that you are paid once or twice a year) to your income statement, you have to spread it over the duration of time that you have worked to get it.
For instance, if you are paid a yearly bonus of $40,000, you have to spread it across the 12 months that you were working.
You can also include the money that you earn from your passive income sources. Accrual accounting and cash accounting can help you track your income sources.
2. Make a List of all the Expenses
Once you finish listing all the sources of income, you have to include all the expenses that you incur over a certain period.
List all fixed expenses that you pay for in a month. Such expenses are quite easy to track because the cost doesn’t change significantly.
After that, list the variable expenses that you incur in a month. Also, include the interest expense that you might incur by repaying something like a student loan.
While tracking such expenses can be quite challenging, you can refer to the different receipts that were issued to you as you were paying for such expenses.
Your credit card and debit card history can also give you an insight into your monthly expenses. Once you go through your credit card and debit card history, you will be able to track the amount of money you spent on various expenses.
While tracking variable expenses can seem challenging, you will get used to tracking such expenses (after creating this personal financial statement more than 3 times).
Moreover, some banks can group your debit card withdrawals into different categories, making it easier for you to track your expenses.
Also, if a certain expense covers you for a long period of time, you have to spread it out over the time that it covers you. For example, if you paid for 3-month car insurance, you have to spread it over the three months that it covers you.
3. Combine The Two and Find The Difference Between Your Net Income and Your Expenses
The next thing that you need to do is find the difference between your net income and your expenditures.
Compute the total amount of money that you earn from different sources of income. After that, compute the money that you spend on different expenses. If you spend less money on expenses, you will have a positive cash flow.
On the other hand, if the total amount of money that you spend on expenses exceeds your cash inflow, you will have a negative cash flow. A negative cash flow can get you into debt.
If you want to get more insight into your expenditures, you can determine the percentage of your expenses concerning your total income.
Such info can help you assess the amount of money that you spend on different expenses.
You should track your income and expenses monthly. A monthly income statement is quite easy to create. Not to mention, you can create an annual income with your all monthly income statements.
Benefits of an Income Statement
With this personal financial statement, you can easily know how your net worth is affected by your spending habits. Your net worth is the difference between your total assets and liabilities.
For instance, if your cash flow statement has a positive cash flow, you can increase your net worth and take it to the next level.
On the other hand, if you have a negative cash flow, you are spending more money than your net income. This might increase the credit card debt that you owe to different organizations or companies.
Not to mention, if you are spending more money on expenses, you might tap into your savings to pay for some expenses and affect your net worth. In severe instances, you might get a negative net worth.
A cash flow statement also gives you some insight into the amount of money that you can save monthly. Once you subtract the total amount of money that you spend on expenses, you will get some insight into the amount of money that you can save or invest.
However, you should have a positive cash flow before you start investing/saving. If you have a surplus, you can easily create an emergency fund account or another savings account.
A personal cash flow statement makes it easier for you to create a personal budget and a solid financial plan. It highlights different expenses that you spend money on. This makes it easier for you to know how you can budget your money and spend less money on certain expenses.
Since a cash flow statement lists the amount of money that you make from different sources, it helps you work on different income sources. For example, this statement lets you work towards your financial goals.
If you had set a financial goal of earning $20,000 from your passive income, a cash flow statement will make it easier for you to assess whether you achieved that goal or not.
A cash flow statement also helps you manage your debts easily.
For instance, once you have some insight into your net cash flow, you will easily determine the amount of money that will be allocated to debt repayment plans. It also makes it easier for you to know whether you can apply for a certain loan or not.
A cash flow statement works side-by-side with a personal balance sheet, making it easier for you to manage your finances.
A personal balance sheet is a document that lists your assets (liquid assets, accounts, and stocks) and personal liabilities (credit card debts, student loan, and personal loans). A personal balance sheet lets you calculate your net worth. A balance sheet also shows you the assets that have a high liquidity.
If you have more assets than liabilities, you will have a positive net worth in your balance sheet. However, if you have more liabilities than assets, you will have a negative net worth on your balance sheet.
For example, if you have a positive cash flow, you can use some of the extra cash to purchase an income-generating asset.
Such assets can be included in a balance sheet and boost your total net worth. On the other hand, if your net worth keeps on deteriorating due to your expenditure, you will have a negative net worth due to debts.
Personal Income Statement Template
Well, you can use different software programs to create a cash flow statement. Not to mention, a personal financial statement template can give you some insight into a cash flow statement.
A personal financial statement template can be created from Excel or Google sheets. Each personal financial statement template has the same functionality.
And there you have it, everything you need to know about a personal income statement. With this personal financial statement, you can easily manage your finances and work on your financial health. Plus, this personal financial statement also helps you create a budget and cut down on extra costs.
To continue learning about financial literacy, see the following articles in the series:
- Good Debt vs. Bad Debt: Know The Difference
- How To Create A Personal Balance Sheet
- Is It Better to Put a Large Down Payment on a House
- Dave Ramsey vs. Robert Kiyosaki: Who Should You Listen To?
I’m a money nerd, small business owner, and personal finance blogger. After job-hopping and ruining my credit in my early 20s, I decided to get serious about money and my career. Now I have top-tier credit, a successful small business, and am on a path to financial independence.