While I think it’s important to understand the concept of an income statement, I don’t actually keep one to track things. This might seem contradictory but I’ll explain.

First of all, it’s too much like budgeting. I don’t like budgeting really cause it takes too much time and it’s generally inaccurate. Secondly, I believe the principles behind the income statement are more important than the statement itself. As we talked about before, the expenses should be less than the gross income. So let’s make sure that this happens.

Build this principle into your life. You’ve probably heard all the variations on this theme:

• “Save 10% of everything you earn.”
• “Set up automatic transfers to a savings or brokerage account.
• “Pay for everything in cash.”
• and so on…

These don’t capture everything though. What if someone consistently puts away 10% of what they earn, but they don’t use their credit cards responsibly? I shouldn’t have to spell out this problem. Taking cash advances and then paying for everything in cash isn’t a good idea either.

This is how I do it:

• As a rule, pay off all credit cards every month. (No Exceptions)
• A percentage is set aside for giving. (more on this later…)
• A percentage is put away for emergency savings.
• A percentage is put away for investments.
• The rest is for all other expenses.

This system ensures that I spend less than what I bring in. It’s that simple.

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