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Calculating Your Personal Profits and Losses

Learn how to assess your personal profits and losses.

In this article, you will find:

Page 1

Calculating Your Personal Profits and Losses

Let's get this chapter off to a strong start by looking at you as not just one person but as a serious, complex financial operation. As such, you need to periodically assess your financial health. The standard measurement of financial health for a business is the profit and loss statement (P&L). This is a simple calculation of how much money the company made, minus expenses, which shows what the net profit or loss was for a given time period (for example, one fiscal year).

It might seem strange to think of yourself as a business and to look at your income and expenses in terms of profit and losses to that business. Yet that oddness is precisely what makes this and the following exercises so useful. If you've never arranged your financial data in this way, doing so will give you a fresh perspective and provide insights you might never have divined solely from your checkbook and bank statement.

People generally don't have fiscal years – we just have years. And we don't think of our lives as having a profit or a loss – we either made good money last year or we didn't. Most of us don't start the new year by calculating how our fourth-quarter figures affected the bottom line in the annual report: We're just trudging through the winter months and dreading the credit card bills from the holidays. But looking at your personal life from this businesslike perspective can be enlightening, so let's do it.

Using the tools you created in the earlier chapters of this book, choose the system that contains your most complete income and expenditure information for the year. If you've been moving money into a savings account (and you haven't spent it), be careful not to include those funds in your expenses.

If you've entered all of your financial data into a money-management software program like Quicken or Microsoft Money, you'll find the totals you need within the program. You'll probably even find a report within the program that will make this calculation for you; just take care to set up the report correctly so it will use data from all of your accounts and give you an accurate result. Until you're very confident with this software, it might be best to make these calculations by hand, at least as a way to check the program's results.

Using the figure below, start with the most basic version of a P&L calculation.

Total Income for Year 20_ _ $
Total Exenditures for Year -$
Difference $

Now you have one number – the difference between your income and your expenditures – and it's either your profit or your loss for the year.

Big deal, you're thinking, what does that really tell me? As it stands, this number doesn't tell you much. You need more detail to understand how that single number came to be so it can be either corrected or replicated in the future.

You can flesh out both the income and the expense portions of the P&L to better analyze why that bottom line ended up the way it did. Try subcategorizing the expense section using the categories you set up in your income and expense tracking document and your bill-paying system. Subtotal each category and brace yourself: You might be shocked to see what groceries add up to over an entire year.

You can also add detail to the income section of the P&L. Do you have more than one source of income, and if so, which was the most profitable?

If your P&L shows less profit than you want, use the rest of the tools in this chapter to pinpoint the problem and do something about it.

Getting In-Depth with Your Debt
When the P&L shows a loss, you have two choices: find more income or reduce expenses. Unfortunately, both can be tough to do. Some expenses, such as loans, are obligations that you can't just stop paying.

Could Stop
Might Be Reducible
Stuck With It
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  Phone bill Visa balance
    Car payment

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