The good news is…
Now is the perfect time to take stock of your finances (which includes all your insurance and investment policies) for the year ahead!
If you can recall in the previous article we discussed the fact that the beginning of a year is the perfect time to take stock of where you are in life – both personally and financially.
In that article we discussed comparing your net worth this year to last year. The follow up to calculate your net worth is drawing up an income statement.
Now that you know your net worth, it’s a good idea to determine what’s coming in and what’s going out. Only then will you be in a position to draw up a budget for the year ahead.
What does an income statement consist of?
An income statement can be divided into three parts:
- Contribution towards savings
Let’s take a look at income…
Here we will include all monies received by your household. Examples would include:
- Interest earned from investments.
- Profits from the sale of a property.
- Rent from tenants
What you now need to do is tally up all these income streams and arrive at a subtotal.
Here we include all payments which are made by your household. These payments could be to meet your daily needs or they could be debt repayments. Examples would include:
- Mortgage bond repayment.
- Car repayments.
Once again you need to tally up all these expenses and arrive at a subtotal.
Contributions towards savings
Another way to word this is to use the phrases ‘net profit’ or ‘net loss’.
Contribution towards savings is the difference between your total expenses and your total income. If your income exceeds your expenses, then the income statement reflects a net profit. A net profit means a positive contribution towards savings, which in turn means you’re getting richer!
Where expenses exceed income we have a net loss, which means a negative contribution towards savings, which means you’re getting poorer…
What are you supposed to do with your income statement?
What you do is take the net profit or loss and carry it over to your balance sheet. On your balance sheet it forms part of your net worth.
Once again the beginning of the New Year is the perfect time to compare this year’s balance sheet to last year’s balance sheet. And as I mentioned in the previous article, you want to see your net worth going deeper and deeper into the black!
Reference – Personal Financial Management 2nd edition – Nico Swart (Juta publishers)
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Until next time.
The InsuranceFundi Team