Manage your personal finances with personal profit and loss statement
What's the story
Lost and without a clue about your finances? Drawing up a personal profit and loss statement is the way to go.
Do you have an idea of the spending you have been incurring, say, for the last three, six, nine months or the whole year?
Are you earning enough to cover your expenses or do you need additional income streams?
P&L statement
What is a personal P&L statement?
Are there any wasteful expenses that you can easily do away with?
If you don't have an immediate answer to all these questions, it is high time that you draw up a personal profit and loss statement.
A personal P&L statement is an accounting statement that gives a breakdown of your income and expenses over a span of time.
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You can draw up a P&L statement varyingly
It largely follows the same principles as adopted by business organizations. You can draw up a P&L statement varyingly on a monthly, quarterly, or annual basis. So, what is in a P&L statement?
Income
First component of the personal P&L statement is Income
Income: The first component of the personal P&L statement is your income. Your income can come from several sources, say, your salary if you are a working professional or your business if you are an entrepreneur, earnings from rent, selling-off assets like gold, and many more.
Expense
The second component is Expense
Expenses: Expenses can be broken down into two categories; fixed and variable.
Fixed expenses recur every month and you can safely predict the extent to which they will eat into your income. Your house rent, postpaid and broadband bills, EMIs are all examples of fixed expense.
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Vehicle fuel, groceries, electricity bills are variable expenses
As the name suggests, variable expenses keep fluctuating. So, expenditure on vehicle fuel, groceries, electricity bills, and others fall under the variable expense category.
P&L statement
What would an individual's P&L look like?
We drew up a hypothetical P&L statement, proceeding on the assumption that you are a salaried professional.
The top line - An accounting term refers to your total income for the month. As you keep moving down the P&L statement, your income is chipped away by several overheads. At the bottom, quite literally is the bottom line, another accounting term.
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What is a bottom line?
The bottom line refers to the money you have at the end of the month after all your expenses have been deducted from your income.
Do you know?
What does your bottom line say?
If your spendings don't exceed your earnings, then your bottom line will be positive. While this is indeed a good place to be in, it should also give you food for thought on further clamping down on expenses, and, pushing up on savings.
Bottom line
Reconsider expenses if your bottom line is negative
In case, your bottom line is negative, you need to seriously reconsider the expenses you have been incurring. A negative bottom line indicates that your expenses are far greater than your income.
Actively cutting back on discretionary spendings while being mindful of avoidable expenses will go a long way in fostering your savings for the long term.
Financial sufficiency
Several apps are available that can monitor income and expenses
There are several apps available that can monitor your income and expenses, and guide you on the path to financial sufficiency.
These apps draw up a graphical representation of the inflow and outflow of your money cautioning you when you go on an unsustainable spending spree.
For instance, the credit card bill-paying app CRED provides its members with the CRED Protect feature.
CRED
CRED members receive a breakdown of their spending habits
Members receive a breakdown of their spending habits. Expenses are categorized into different groupings like shopping, food, entertainment, health, etc.
The feature also alerts its users to sudden or inaccurate spikes in monthly charges or fees while keeping them in the loop about payment due dates.
To become a CRED member and get exclusive rewards and cash-backs for paying credit card bills, proceed here.