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Old 01-22-2009, 08:02 AM   #1
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Personal Income Statement

I'm a pretty numbers-oriented person, and with the new year I have been spending time looking at income and expense to see how we are doing. I do an income statement and also a plan for the coming year.

Previously, I have included the principal portion of mortgage payments as an expense. It is pretty clear that this is really a balance sheet/investment issue and does not belong on an income statement. Any thoughts?

I have also included "capital" items like changes to the house (kitchen countertops for example). And also things like a new TV. In a business setting, the former would probably be capitalized and depreciated and the latter expensed. I'm not really interested in doing that for a personal income statement, and anyway I'm more concerned about the actual cash flow. I'm thinking I will just leave these items as an expense. Any thoughts about that?

I appreciate any comments.
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Old 01-22-2009, 08:10 AM   #2
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Previously, I have included the principal portion of mortgage payments as an expense. It is pretty clear that this is really a balance sheet/investment issue and does not belong on an income statement. Any thoughts?
For me, mortgage interest would be an expense but paying down principal is not. It's a cash flow item, but not an expense. Expenses reduce your net worth. A $500 paydown of mortgage principal doesn't reduce your net worth by $500; it reduces assets by $500 but also reduces liabilities by $500, resulting in no net change. You're effectively "moving" money from one account to another. That's true of *any* debt payments; principal paydown is not an expense, but the interest on the debt is.

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I have also included "capital" items like changes to the house (kitchen countertops for example). And also things like a new TV. In a business setting, the former would probably be capitalized and depreciated and the latter expensed. I'm not really interested in doing that for a personal income statement, and anyway I'm more concerned about the actual cash flow. I'm thinking I will just leave these items as an expense. Any thoughts about that?
I don't include furnishings like a new TV, personally. I really don't include any purchased depreciating asset other than a very conservative value estimate of the cars if something really hit the fan and we had to sell one. I would consider significant work on the house that increases its value, though, as an "expense" of the work done at least partially offset by an increase in the home asset's value. Most likely it wouldn't be one-to-one; if I had $15,000 of work done that I figured would increase the home value by $10,000, by entering both you drop $5,000 in net worth.

But in the end, what works for you is what's important.
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Old 01-22-2009, 08:11 AM   #3
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I think the best way to categorize these expenses would be whatever way makes more sense to you.

To me, mortgage P&I is an expense because I would be having to pay rent if I didn't own, and because the mortgage is an expense that I MUST pay to continue to live my present lifestyle. But arguments can be made either way.

Most people buy their houses as a place to live, rather than as an investment. This is a good thing, given that most houses seem to be declining in value these days.

Before I paid off my house, I was computing my expenses without my mortgage (as well as with my mortgage) just so that I would know what I might need in retirement. I still counted my mortgage as an expense, though, and computed my expenses both ways.
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Old 01-22-2009, 08:25 AM   #4
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Previously, I have included the principal portion of mortgage payments as an expense. It is pretty clear that this is really a balance sheet/investment issue and does not belong on an income statement. Any thoughts?
The total mortgage payment should be on the income statement.
Income statement = total income less total outflows

The balance sheet should record the different mortgage payment allocations.
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Old 01-22-2009, 08:29 AM   #5
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It depends on how you plan to use your numbers. If your question is "How much will I need to maintain my lifestyle when I retire?" or "Is our cash flow adequate to trade up to a more expensive house?", then there is no point in breaking the mortgage payment apart.

If you are trying to get a feeling for how much you are "living for today" vs. how much you are "saving for tomorrow", then you may want to break it apart so you can put it in two different buckets.
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Old 01-22-2009, 08:29 AM   #6
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The mortgage is a LIABILITY. Each payment has at least two components (if it is a amortizing one), Principal and Interest. The principal is a REDUCTION in the Liability and the interest is an EXPENSE. The Interest is a Income Statement Item and the Principal is a Net Worth item. The difference between what you paid for the home less the mortgage is your EQUITY (forget completely about Market Value it has no meaning, at least in this instance). Capital items (like counter tops or anything else that cannot be reasonably taken with you when you sell) add to the value/cost of the home (addition to EQUITY). TV's, furniture, etc., unless they will be sold with the house, are EXPENSE items. Having said all of this, your accounting is not subject to audit or otherwise going to be graded, so however you want to do it is fine IMHO. I would suggest that you have to be consistent in your treatment of the numbers for them to have any lasting meaning to yourself. Since you have a computer there are a lot of financial programs (MS Money, Quicken, etc.,) and Spread Sheet Programs (Excel, Open Office (FREE)) and some others that you can download for use. If these do nothing else they do instill consistency. BTW, as someone pointed out some time ago, if you have excel, there are a lot of FREE templates already set up (that your can modify) at the MS Web-Site.
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Old 01-22-2009, 09:47 AM   #7
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I don't do income/cashflow statements. I just do a balance sheet every quarter. I include conservatively estimated values for house and cars (as assets) and the mortgage and other loans as liabilities. As the principal is repaid, this decreases the liabilities side of the balance sheet. Changes in value of assets (ie increase in house value, depreciation of cars) are kept track of on the asset side.

I also have large student loans and occasionally other large loans. The repayment of principal on these loans has a significant effect on changes in my net worth and my estimate of my own financial independence. As a result, I track these on my personal balance sheet.

I don't track small capital purchases, minor home improvements/repairs (except as it might affect market value of my house), paid up insurance policies or other pre-paid expenses. Those are all largely insignificant in the NW tracking over time and would probably be overcome by rounding errors.

But focus on what you want to use the info for. If you just want a portfolio valuation, then just do that. If you want a total net worth statement, then set up a system that lets you track how principal payments on debt affect your NW. There seems to be a recurring debate here over whether house and car values and mortgage balances should be included in NW. Both sides are right, depending on what you mean by NW and what you are going to use your NW metric for.
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Old 01-22-2009, 09:57 AM   #8
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I think Dex has put it most simply. The end result of your cash flow statement should be a net discretionary cash flow (the difference between inflow and outflow - hopefully positive!). The change in assets/liability amounts will be reflected on the balance sheet.
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Old 01-22-2009, 06:14 PM   #9
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Thanks for the responses, very interesting.

I'm doing the income statement so I can tell whether income is covering expenses. Just to make sure we're not spending too much or keeping the lid on too tight. I don't want to sell assets to fund expenses and if I can I would like to have some left over (profit) to add to assets.

Another reason I can see to keep the principal payment off the income statement is that if I were to pay off the mortgages, it wouldn't cause a blip in the numbers. Interest expense would go down, but investment income would also decline.

The capital spending on the house and furnishings seem more discretionary to me. That is why I'm thinking I should leave them on, even though to some extent they do increase the asset side of the balance sheet.
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Old 01-22-2009, 06:25 PM   #10
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...BTW, as someone pointed out some time ago, if you have excel, there are a lot of FREE templates already set up (that your can modify) at the MS Web-Site.
You rang?
http://office.microsoft.com/en-us/te...emplates%2Easp
you can search for certain types of spreadsheets, or just scroll halfway down the page and look at the template categories. ALL FREE!!!!
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