We saw how the balance sheet is a very important statement in personal finance. Here is an attempt to explain the Income and Expenditure statement.

Only when you write down all your expenses will you be able to track your expenses. Only when you know whether you are spending on unnecessary clothes, or eating out, or travel will you be able to control your expenses. This will help you know where you can find money for all your goals. Remember that if you do not allocate money (energy) to your goals, then it is not a goal, it is just a wish statement!

Let us see what could be sources of Income: 

Salary, wages, bonus, tips: depending on where you earn money from.

Profits – for those who are doing their own business/ practice / consultancy

Annuities, pension, – money received from retirement plans etc.

Alimony – for those women who get some alimony or child payments

Investment Income – rent, interest, dividends,

Miscellaneous – what has been missed out above.

Let us see what could be sources of expenses:

Fixed expenses: (expenses which cannot be controlled over the short term)

Completely uncontrollable – taxation (GST or IT)

Home Rent / EMI paid

Utilities: gas, water, electricity, telephone

Asset management charges (invisible, but happens!)

Interest – loan repayment on car, personal loan, credit card, etc.

Property tax (uncontrollable)

Insurance – auto, medical, critical illness, disability, miscellaneous.

Miscellaneous – supporting parents, siblings, children…

Variable Expenses: Some of these payments are controllable and variable. Sure it will look like they are not controllable, but look hard and you will find what is right…

Food – this is the raw material costs for eating at home. Does not include eating out – that is a fashion statement or a luxury.

Clothing – necessary, formal, and luxury

Conveyance – for local travel

Travel – for vacations etc.

Recreation – entertainment, dining out, club membership, hobbies, etc.

Household maintenance – cleaning service, domestic servant, gardener, window cleaning, etc.

Transportation – car expenses, fuel, maintenance, etc

‘Education – school fees, college fees, etc.

Medical expenses – medicines, doctors fees, hospital charges, etc.

Religion and Charity – what you give to your Church, Temple …etc. and the amount that you give to orphanage, etc.

Miscellaneous – pets, etc.

The amount that you will be able to use for your goals is normally Income Minus Expenses.

Income – Expenses  < 0 is real bad news

Income – Expenses  = 0 is also bad news

Income – Expenses > 0 the surplus

Income – Expenses >0. Leaves enough for all goals!

The best option is obviously the 4th one.

The Income and exp statement and Balance sheet are both great. However, you also need a statement called the Cash coming in and going out.