What you earn and what you spend ?
Now let’s talk about your personal income statement. The optimal equation for your personal income statement is that income must always be greater than expense. If the reverse is the case, you will end up in a deficit, which may lead to borrowing and ultimately end you up in the perpetual debt conundrum. Active income are earnings from salaried jobs, vocation or business. Passive income are earnings from investments, gifts and transfer are financial benefits received from the goodwill of others. They are not regular and cannot be estimated.
Needs are expenses for necessities such as feeding, housing, transport, personal grooming etc.
Wants are expenses on desirable purchases/consumables for instance a holiday, these can usually be controlled.
The first thing to note about your personal income statement is that you should never spend all you earn. Keep your expenses (needs and wants) well within your active income, that’s your surefire way to achieve a surplus of earnings over expenses.
Learn to reinvest earnings from your passive income, you are putting money away for the future when you may not have active income. Ensure you keep growing income from your passive sources. Avoid spending money that you are yet to earn, it is an expressway to indebtedness.
Keep what you owe at a minimum, you will have to pay from what you earn or what you own. Finally, don’t depend too much on gifts and transfers, they are not predictable, when you do get them, you can add them to your income generating assets to grow your passive income.
How do they relate?
Your personal financial position and your personal income statement are connected.
1. The capital that goes into what you own (income generating assets) typically comes from the surplus of what you earn over what you spend.
2. The bulk of passive income usually comes from income generating assets. Hence you cannot grow what you own without what you earn.
3. Your expenses generating assets (what you own) can have an impact on what you earn if expenses from this source is allowed to balloon.
4. Investment loans can be a good source of generating additional passive income, if such investment can repay principal and interest on loan and still leave a profit.
5. What you spend as a percentage of what you earn determines your surplus/deficit and what ultimately goes into what you own or what you owe.
How do I use my personal financial statement to influence my financial future?
Your personal financial statement is a decision-making tool to help you understand your financial health and take necessary action to improve it. The deal is to keep an eye on your income and expenditure as well as assets and liabilities to take corrective action to stay on course of your goal for financial freedom and financial independence.
To achieve the above a budget is necessary. Your budget is your financial plan.
Senator Elizabeth Warren propagated the so-called ‘50/30/20’ budget rule in her book ‘All Your Worth: The Ultimate Lifetime Money Plan’. This rule only requires you to track and divide your expenses into three main categories: needs, wants and savings or debt. The basic rule is to divide up your income and allocate it to spend: 50% on needs, 30% on wants and socking away 20% to savings.
Earnings and Expenses are a critical success factor in being able to build a personal balance sheet from ground up. While earnings may be limited, expenses can grow easily.
At PAC Asset Management, we offer a wide range of investment options including monthly savings plans for individuals/organizations. Our open-ended Mutual Fund options with varying risk objectives, help investors achieve their set investment plan vis-à-vis liquidity.
Hence, this enables investors subscribe additional units to the fund or redeem part or all units at any point in time. We believe that investing should not only be easy but that every interaction with us should be a memorable experience.
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