[Note: Please read the website disclosure statement]
Are you profitable? The Basics of Constructing a Personal Profit & Loss Statement
When I worked in the finance industry, I discovered a troubling truth: A large percentage of the people I talked to were unsure how much they made and spent each month. This may sound too crazy to be true, but it is. I cannot tell you the number of times I had to manually calculate someone’s income or ask them to look at their bank statements to come up with their expenses.
While most people know one of these two figures, they likely do not know how to determine if they live within their means. Therefore, I think it is essential for everyone to create a profit and loss statement for their household, period. How else can you tell if you live within your means? The added benefit of doing one, is that once you are aware of your spending habits, you likely will become more mindful of them.
So starting with the basics, a Profit & Loss Statement must include two simple things: Your income and expenses. Now you can break down your profit and loss statement to be as detailed as you want or leave it as simplistic. Let us look at the following example below:
|Primary job after-taxes||+$4,000|
|Rent or Mortgage||-$2,000|
|Necessities (Groceries, utilities, transportation)||-$800|
|Student loan payments||-$500|
|Discretionary (i.e., fun spending)||-$1,000|
|Profit or Loss (Total of all prior numbers)||$0|
As you can see in our example, the person we depicted has a net profit of $0, meaning that they live within their means but have nothing left to save. Therefore, everyone should make it their goal to at least hit this figure, no buts.
Realistically only breaking even is not enough though, if you want to achieve financial freedom and have the ability to live life your way, you need to have a profit left that you can save.
But Mile High Finance Guy, I am living at my means. I realize that what I am about to say comes from a privileged position, but if that is the case, then re-evaluate what your means genuinely are. Many people think that they cannot find additional ways to save money or cut down their expenses. From what I saw firsthand working in a financial advisory capacity, only some people truly are living at their means in the United States. The vast majority of people consider their essentials to include many things that are not essential, so be honest and critical.
If someone was to ask you what is more important, your freedom or some shiny object that [insert name of an influencer] has? Your answer should be the first because that influencer likely already has their freedom financially. If you do not, meaning you could stop working today for the rest of your life, you do not. This does not mean to deprive yourself because you are not free yet. Instead, it means to ask yourself difficult questions.
Does this purchase bring me genuine happiness that will last, or will it be another object that breaks down that inevitably must be replaced? Is this experience something that will bring me memories that I will cherish, or is it something that I won’t remember?
Starting with these tough questions will help you initially realize what matters and what does not. For example, while I do not derive value from paying for cable or a monthly streaming service, you might. For me, I value the outdoors, and I am willing to pay for quality hiking boots to explore them. Buy what you truly care about and what will genuinely improve your quality of life; all else should be optional at best.
Once you have a surplus, this is where things begin to get fun. This is the beginning of buying your freedom so that work is a choice, not a necessity. For some, this may include dropping out of work altogether; for others, it can mean quitting a toxic job to chase their passion, regardless of what it pays.
Taking this surplus, I encourage you to start saving using retirement accounts. I will be creating a post in the future that discusses which accounts to use and what order to save in, but for now, focus these immediate steps:
•If you have a 401(k) and it offers a match, contribute up to that (same for HSA accounts)
•If you have high-interest debt, pay that off
•Max out your HSA if you have one
•Contribute to a 401(k) or IRA
By using this strategy, your future can be yours. A future filled with the ability to be empowered to make decisions because you want to, not because you have to. Want to splurge on a luxury good and have financial freedom? Go for it! Want to stop working? Go for it! Want to chase your passion for being an artist? You got this! This is the power of owning your finances, and it all starts with creating your own profit and loss statement. So what are you waiting for? Get started now and put together a plan on how you will begin saving and trimming down your expenses!
Mile High Finance Guy
finance demystified, one mountain at a time