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In order to enjoy financial security, you have to keep track of exactly where you stand in the money department. Part of doing that is maintaining a personal income statement. 

A personal income statement is really just an accounting of where your money comes from and goes to each month. It is similar to a personal budget, except it is an actual accounting of what has happened rather than a plan for what should happen. With an income statement, you can calculate your net income and make sure you’re always in the black.

If you use financial or budget software to keep your personal books, you can usually generate an income statement very easily. Programs like Quicken from Intuit (Stock Quote: INTU) and Microsoft Money (Stock Quote: MSFT) allow you to input all of your financial information and reconcile it with your banking statements.

If you don’t use a financial software application, however, you still can easily build your own personal income statement using Excel or another spreadsheet application. You just need two tables, one for income and one for expenses. If you are new to Excel, you can use the “Monthly Home Budget” template that comes with the program as a shortcut. It’s not exactly the same as an income statement, but it is similar.

To start building your income statement from scratch, focus on your income sources. Create a table that itemizes where income comes from each month. For most people, the main source of income is a full-time job. If you have a second job, rental property or a small business, however, that should also be included. Create columns for each month so you can compare months side-by-side. Total up all income at the bottom of each month’s column.

Next, create an expenses table below the income table. This usually takes more time than creating the income table because you’ll likely have more inputs. You can choose to either input each expense individually or lump expenses into categories. Making categories like “Rent/Mortgage” or “Dining” or “Transportation” allows you to see an overview of where your money is going. (You may want to make separate tables to itemize each expense within a category.) Total up all of your expenses at the end of each month’s column.

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Finally, create a line item that calculates monthly net income. To do this, subtract total expenses from total income for each month. If the resulting number is negative, that means you have spent more than you earned and it should be highlighted in red. Negative cash flow is the cardinal sin of managing your money. If you consistently find yourself in a negative cash flow situation, you need to take a hard look at where your money is going and how you can adjust your expenses to live within your means.

Once you create a personal income statement, maintaining it is just a matter of entering your income and expenses each month. The easiest way to do this is when you pay your bills and when you balance your checkbook. When you get in the habit of maintaining your personal income statement, it should only take a few extra minutes of your time. But knowing where you stand can help you get where you want to be.

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