Your Income vs Your Expenses
Now that you’re done with your Net Worth Statement, it’s time that you take a look at your cash flow.
Let’s start again by defining what cash flow is. Investopedia states:
A revenue or expense stream that changes a cash account over a given period.
Sounds complicated but it really is all about your income and your expenses.
Just like your net worth, you can also track your cash flow using a cash flow statement.
But before diving right into your cash flow statement, let’s first determine and have an idea of what we should put inside that statement.
Income – What Comes In
How do you get your income?
The most common income stream is from employment salaries.
But as you will gradually learn while pursuing personal finance, you should build additional income streams to eventually quit your job and become financially free.
I’m getting ahead of myself, let’s see a few examples of income to get you started with your cash flow statement.
- Employment salary
- Interest from savings accounts
- Rent payments from investment properties
- Dividends from companies or from stock investments
- Business income
- Pension benefits
Remember that this is not an exhaustive list.
You can add more income sources to your cash flow statement and maybe you can share us your insights by commenting at the comment box below this post.
Expenses – What Comes Out
In this part, you have to think carefully and be honest to yourself.
You should list all your expenses.
Expenses that are ongoing, one-time expenses and of course expenses on things we don’t need but we still go ahead and spend on it.
Examples for these are the following:
- Home mortgage or rent payments
- Utility bills (Telephone, Internet, Cable TV)
- Transportation (Bus fares, Gas)
- Education (Books, Seminars, Workshops)
- Credit Card payments
In a nutshell, these are all the thing you spend money on.
If you were totally honest in listing your expenses down, you could be surprised at how much you are spending!
But, as you go along your journey to personal finance and mastering money management you will naturally pursue keeping unnecessary expenses at the minimum and creating more and more income sources.
Your Cash Flow Statement
It’s very easy to create your cash flow statement once you’ve listed all your income and expenses (Don’t forget the amounts!).
All you have to do is add up all the income you get then subtract all the expenses from it.
You can use a worksheet / template similar to your net worth statement in doing this.
Now, if you have more income than expenses (if you got a positive amount after you subtract expenses from income) then congratulations!
It means that you have a surplus of money that you can invest! (Later on, I will tell you the winning formula on how you can invest more money each month)
I’m getting ahead of myself again, let’s put aside investing first because before you can really do that, you must establish your safety funds first.
But, if you have more expenses than income don’t fret because that’s a problem that can be addressed.
Since you are aware of what expenses you make, you can either create more streams of income or get rid of unnecessary expenses.
Personally, I would recommend both.
Although for some it’s easier to do away with needless spending first before creating more income streams.
You made it this far!
I can really sense that you are beginning to be more and more serious about personal finance and money management.
Are you done with your Net Worth Statement?
The next step is to establish your Safety Funds.
Until then, I hope to see more and more of you (and your friends, colleagues, family members) here so that I can share my personal experiences and knowledge about personal finance.
To our success in all areas of life,
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