Other than the Balance Sheet, the other important financial statement for every individual is the Income Statement. For more information on balance sheet creation, see Creating Your Balance Sheet With Dr Wealth. The Income Statement is basically made up of Income and Expenses, with the Savings as the final figure.
Tracking and categorizing individual Income and Expenses item requires a lot of time and effort. Fortunately, Dr Wealth is able to provide a systematic manner to budget your income and expenses according to the 50/30/20 rule.
Income Statement Summary Using Dr Wealth
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Income items are basically inflows which add to your net worth. The Income items include Active Income which is Basic Salary and Bonus. Other Income items include Dividends, Rental and Interest Income. They are basically income payments from Stock, Property and Bond investments respectively.
By keying all the Income items, you will be able to know your total annual gross income. Dr Wealth also automatically calculates Income Tax based on the tax code and deductions which you key in.
Expense items are basically outflows and they can be divided broadly into Essential Expenses and Lifestyle Expenses.
Essential expenses are made up of 4 main categories, Household, Transportation, Personal and Dependents.
Household Items include housing loans if the house is for own stay. Other household costs might include utilities and groceries.
Transportation includes cost of private transport if you have one and/or cost of public transport.
Personal Expenses include medical expenses, insurance, religious donations, personal grooming and more.
Dependents Expenses include insurance, education and living expenses for dependents such as children or parents.
We advocate that people don’t spend more than 50% of their annual income on essential expenses.
Lifestyle expenses are mainly Travel and Entertainment such as holidays, dining out as well as Luxury Expenses such as luxury goods. Another definition of luxury goods could be any consumable item that costs above $500 in value. We advocate that Lifestyle expenses shouldn’t be more than 30% of your income.
Other loans are basically repayments to loans which are used in investments such as mortgage loans to buy investment properties and loans to buy stocks.
After keying all the income and expenses data, Dr Wealth system is able to quickly calculate your annual savings and manage it. If you followed the rule of 50% for Essential and 30% for Lifestyle expenses, your savings ratio should be above 20% of your income.
Next, we will cover how we can use the Balance Sheet and Income Statement information to generate your financial health report.
About the Author
Calvin Yeo, CFA, CFP is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is is revolutionizing the financial advisory industry by building an online platform to provide high quality and comprehensive financial advice.
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