Financial Statements

Income statement

What did I earn and spend? Net income over a period of time. This normally shows revenue-expenses = net income

Balance sheet

What do I own and owe? Net worth at a period in time. This normally represents assets=liabilities + equity

Cash flow statement

What actually hit my account? Liquidity over a period of time.

Cash accounting

Record when money actually moves - loan payment is in cash

Accural accounting

Record when something is earned or owed, regardless of cash

Cash flow statement inflows and outflows

Inflows: wages/salary, investment income, other income (gifts, side work)

Outflows: Required expenses (rent, loan payment, insurance), discretionary expenses (dining, enterttainment, clothing)

Net cash flows is inflows - outflows

What goes on a personal balance sheet?

Liquid financial assets: Cash, checking, savings, HYSA, brokerage, retirement accounts

Collateral backed assets: Car, home; include if you’re showing the matching loan as the asset and liability go together

Personal use assets: Clothing, electronics, furniture; include things you would sell to cover a liability not things for day to day use

Liquidity Ratio

Liquid assets/monthly expenses: Should be greater than 1%

Savings rate

Annual savings/Gross income: Should be greater than or equal to 10-15%

Debt to income ratio

Monthly debt payments/gross monthly income: Should be less than 36%

Housing cost ratio

Monthly housing/gross monthly income: Should be less than 28%