Reading the Statement

This document is a companion to the monthly financial statement. It discusses each sheet of the statement in a general way that should apply to any month.

Balance Sheet

The balance sheet compares assets to liabilities. The “bottom line” of the balance sheet is your equity (also called “net worth”). This is known as the fundamental accounting equation:

equity = assets - liabilities

You want your equity to be a number above 0.

Budget Balance Sheet

The budget balance sheet compares real expenditures with budget expectations. There are two columns to the budget balance sheet:

  • delta, which indicates how close real spending was to expectations
  • running balance, which accumulates budget overruns

The sheet is also separated into budgeted expenses as well as unbudgeted. Over time, unbudgeted expenses ought to be minimized, either by budgeting differently or by changing behaviors.

A rule of thumb for budgeting is to keep the balance within 10% of the overall budget. So, a budget of approximately $8000 could vary by $800 (total expenses of $7200 - $8800) and still be considered reasonable. When the budget is outside that range, it loses some usefulness for controlling accounts.

Income and Expense Sheet

The income and expenses sheet summarizes where cash came from, where it went, and how much cashflow there was. The bottom line for this report is the net cashflow. Since expenses are listed as positive numbers, and income as negative, the bottom line for this report ought to be negative in order to maintain healthy finances.

Cashflow Year-to-Date

This plot depicts the monthly rate of cashflow over the course of the year. When income routinely exceeds expenses, a visible wedge will form over the months to indicate the net inflow of cash. If income chronically chases expenses, then you are “living paycheck to paycheck.” If income climbs away from expenses, then the accounts are being critically mismanaged and it is time to revisit the budget.

Monthly Income and Expense, Year-to-Date

It can be useful to see how income and expenses vary on a monthly basis over the course of the year. When these amounts are consistent over the course of months, you can infer that your income and expenses are relatively stable. Variability in these amounts could indicate seasonality or lack of financial controls.

Wealth Growth, Year-to-Date

The “wealthgrow” report is like cashflow for net wealth. Changes in assets and liabilities are plotted over time. There should be relatively little change in liabilities as time goes on - credit needs to be managed and large debts should be paid in predictable increments. Assets that are earning a healthy return will cause the assets slope to be slightly positive.

Next Steps

[To dig deeper, install the ledger project on your workstation.](installation.md)