The Personal Profit & Loss Statement
The Personal Profit and Loss Statement tracks one’s income and expenses to find whether the person is making a profit or a loss each month.
Tracking your profit and loss each month is a great exercise to train yourself into being more conscious of your spending habits. I have been doing this for over ten years now and I have found it as a great way to set a financial goal for each month and stick to it.
At the end of each month, I look at my bank statements to figure my total income which is the painless and easy part of the exercise.
Then, I add up all of my expenses and put them in categories. In as little as a month or two, you have enough information to make some life-changing decisions.
The Intelligent Saver
Here’s a quick example of what a Profit and Loss Statement might look like. Keep in mind, most online banking software will do this for you.
This simple equation can change your life:
Monthly Income - Monthly Expenses = Profit or Loss
Credit Cards Are Your Friend, If You Pay Them Off Every Month
To figure my total expenses, I simply use only one credit card to pay for everything, which is a super easy way to track my expenses and add them up at the end of each month. ONLY USE A CREDIT CARD IF YOU CAN COMPLETELY PAY IT OFF EACH MONTH.
Credit cards with travel rewards are an easy way to get a free flight or two each year. You’re spending money, why not get the added perk of free travel? Please, just make sure to only use a credit card if you can pay it off in full each month.
The Personal Profit and Loss Equation
Income - Expenses = Profit or Loss
$2,000 - $1,000 = $1,000 Profit
Savings Rate = Profit ÷ Income
$1,000 Profit ÷ $2,000 Income = 50% Savings Rate
My End of Month Routine
These are the metrics I track each month. Normally, it takes about ten minutes of my time, and once you have gotten your system down it only gets easier. This exercise is important for a few reasons:
By tracking your expenses you are able to identify a spending budget which becomes a monthly habit. If you find you normally spend $1,200 each month, then that is your goal. Anything more than that should go immediately into your savings account once you get paid. So for example, if you receive an income of $2,400 each month and you know that you usually spend $1,200 each month. Then put $1,200 in savings and keep $1,200 in your checking account.
Keeping track of my savings rate has turned into a personal challenge for me. Each month I try to increase my savings rate, even if it is a percentage point or two. At one point, I was saving over 60% of my income! But don’t be discouraged. If you are saving 5% of your income, then set a goal for 10% next month. We are all at different stages of life and this will be reflected in the amount of money you are able to save. By setting a goal to save more each month, your spending habits will adjust toward a downward trend.
Adding up your total savings each month is added motivation. It is a good feeling knowing that you are saving more than you are spending. Also, I give myself a savings goal for the year, which provides a number to strive for throughout the year.
Ten Minutes to Freedom
Figuring out your personal profit and loss, savings rate and net worth are the absolute minimum you should be tracking each month. You are probably reading this blog because you are interested in getting ahead and maybe even retiring one day. This is an easy way to get started. And, it only takes ten minutes. Tracking these metrics changed my life and I hope it does the same for you!
Figure out your own true hourly wage. Then, figure out how many hours you have to work to pay off your monthly debts. This exercise is not meant to be depressing, but rather as motivation for the future.