Once you have a copy of your income statement in front of you, what do the numbers mean? How do you read this report and use the information to your advantage?
The top of the report is your date range. If you are reviewing your monthly income and expenses, then you will only have one date range in front of you. If you are looking at multiple dates or need a quarterly view, changing your date range will change the information. This is where a software program like QuickBooks can help. The program catalogs all of the info that you have entered and lets you see it how you need it. If you are using Excel, you will have to make the numbers work accordingly.
The first category on an income statement is your Income. You may have multiple streams of income and they should be listed in alphabetical order. All deposits to your bank account(s) or all money that you have received in cash should be accounted for here. This is usually the number that you report as income on your tax return and should have backup proof on hand if needed.
The next set of numbers are your Expenses. These are also listed in alphabetical order. This is the section of the report that causes stress for most people. Actually seeing where all of the money went is an eye opener and shouldn’t be viewed with judgment. If you review the numbers and realize the reality of your spending habits, you can make changes and adjustments as needed. This is the best part of the report to apply money saving strategies. If you notice that you spend a lot of money on groceries, maybe you can use more coupons. If you notice that your Entertainment of Fuel expenses are high, maybe you can invite friends over and do things at home once or twice a month.
The bottom total is your net income or loss. This is another part of the report that can be life changing if you view the information as intended. If you have a profit at the end of the month, you are living within your means and should put this extra income into savings as an emergency fund. You can also use this money to invest in your future once you have your emergency fund in place.
If you have a net loss, you have spent more than you earned and used credit cards or loans to fund your lifestyle. The larger the loss, the more cost cutting strategies you should apply. Watch this number on a monthly basis and if you still can’t cut costs enough to live within your income number, you might need to get another source of income so that you can stop living on credit and begin to save money for your future.
The great thing about this report is that you are in charge of the bottom line. You will quickly realize if you have learned a thing or two about money and finance or if you need more help. You can work with a bookkeeper or a financial planner to help you get your budget under control or read all that you can get your hands on and learn on your own.
This information should be viewed on at least a monthly basis. If you can track your income and expenses on a weekly basis, your savings will build faster. The more money you have in the bank or invested, the more secure your future will become. Mastering money skills is an ongoing process and a skill to be passed on to future generations.
I am here to help and answer any questions that you have. You can subscribe to my blog for future information or send me a message on my Facebook page at http://www.Facebook.com/ProjectDone which I will gladly answer. If you feel that you need additional help, you can contact me by email and we can set some time aside to get your numbers to work to your advantage!
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