Becoming the CFO of your life: Personal Finance basics – Income Statement Analysis (Part 2)

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Once you have had a chance to study your income in Becoming the CFO of your life: Personal Finance basics - Understanding your income statement (Part 1) of this series , we then take one step forward to understand our financial health need to understand how well we are doing. We look at 3 simple numbers to be able to understand how well you are doing with regards to your income.

Thee three numbers to assess the financial metrics to measure yourself are
  1. Top Line Growth
  2. Savings Rate
  3. Survival Rate

 Top Line Growth

  • How have your earnings grown over the last year?
  • How have your earnings grown over the last 3 years, 5 years, 10 years?
  • A good top line growth indicates that your value in the market place is increasing as your salary is growing
  • A good top line growth can also indicate that your investments are generating additional income leading to top line growth
  • A poor top line growth is indicative of a problem which needs to be studied further of how to increase your earnings

Savings Rate
  • What percent of your salary are you saving?
  • To understand the power of savings rate, see this example
    • If you earn 100, spend 10 and save 90 - after working for 1 year you need not work for 9 years
    • If you earn 100, spend 90 and save 10 - after working for 9 years you need not work for 1 year

Survival Rate

  • Survival Rate is the number of months you can survive without a salary i.e. you are completely reliant on your salary
  • Losing a job is a possible reality in today’s world
  • Survival rate = 12*(Total Savings/Annual expenses)
So, what should I do make myself financially strong?

  • Focus on increasing your top line growth by increasing your value in the market place supported from higher earnings from your investments.
  • Keep your expenses same even if your earnings are growing. It will improve your savings rate.
  • With a high level of savings your survival rate will increase.
Now that we have looked at our income statement we increase our expertise with our personal finance by looking at our personal balance sheet in the Part 3 of this series.

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