# How to Draw the ‘T’

By | June 30, 2015

As kids, we’ve often ‘stolen’ change from our parents and pooled in the coins to share an ice-cream with our friends. There was always that one friend, to your awe and annoyance, who seemed to be able to keep track of exactly how much you owed him from months ago.

Of course, as adults finances seem a lot more complicated than that, but they don’t have to be.

Here’s how you can draw your own personal ‘T’ journal (that accountants use) and assess your financial situation realistically.

Preparing your own Personal P&L Account

This is a statement of your income and expenses. Record all the earnings, i.e. your salary or business income, income from dividends, interest and any other miscellaneous earnings. Put down the expenses either below the earnings column or on the right side of it. The expenses can be further categorized as fixed, variable and one-time expenses.

Here is a sample of an income and expense account of an individual for the month of June 2015:

 Earnings Amount (Rs) Salary (net of taxes) 2,00,000 Earnings from property 20,000 Dividends 5,000 Interest income 2,000 Any other* 43,000 Total 2,70,000 Expenses EMIs 65,000 Investments (SIPs, Insurance premium, etc) 25,000 Grocery and other food items 35,000 Travel expenses 15,000 Utility bills, salary to domestic help 10,000 Kids education 20,000 Entertainment (movies, eating out, vacations) 25,000 Medical expenses 12,000 Miscellaneous# 30,000 Total 2,37,000 Total savings 33,000

*Proceeds from sale of old car; #Loan to a relative

In the month of June, the individual had an overall savings of Rs 33,000, after accounting for all other expenses. A detailed study of this income and expense account tells us that the individual has regular monthly earnings of Rs 2,20,000 (salary and rental income), and fixed expenses (barring entertainment, medical and miscellaneous expenses) of Rs 1,70,000.

His total monthly savings are 11% of his total regular earnings and 15% of the total fixed expenses. This is one area where he can increase his allocation, given that he has Rs 50,000 (2,20,000-1,70,000) surplus after accounting for all fixed expenses. If required, he can cut down on entertainment and miscellaneous expenses.

Though a balance sheet, or a record of assets and liabilities, is meant for a specific period (usually a financial year for businesses), you can keep it simple by recording the assets (investments, cash, receivables, etc) and liabilities (loans and payables) at their market/fair value on a particular date. Say 30 June 2015.

Value of assets and liabilities on 30 June 2015

 Assets Value (Rs) Surplus cash (in savings account) 50,000 Equity investments (Mutual funds and direct equity) 5,00,000 Debt investments (FDs and debt MF) 3,00,000 Retirement savings (Investment in EPF, PPF and traditional insurance policies) 11,00,000 Value of properties(s) 1,50,00,000 Residual value of car 4,50,000 Receivables (loans given to friends and relatives at no interest) 50,000 Total (a) 1,74,50,000 Liabilities Home loan 60,00,000 Car loan 6,00,000 Credit card balances 44,000 Total (b) 66,44,000 Net worth (a-b) 1,08,06,000

This individual has a lower level of liabilities vis-à-vis assets. However, the value of his liquid assets (FDs, equity investments and cash) is just Rs 8,50,000 compared to the total asset value of 1,74,50,000. He can certainly increase their value.

Given the individual earns a monthly salary of Rs 2,00,000, he should have higher cash in hand, at least Rs 5,00,000 (three months’ worth expenses).

We can see that he has allocated a very high amount (Rs 14 lakh) towards debt investments, including his pension savings, compared to Rs 5 lakh in equity investment. He needs to improve his equity/debt investment ratio for better returns and higher tax efficiency.

Financial Health Check-Up

It is quite likely that your personal P&L account and balance sheet would look entirely different from the examples above. Maintaining such records gives you a fair idea about how your money is fairing, savings and otherwise.

By simply looking at such records, you can easily surmise if your expenses are balanced and necessary or if you are making enough investments. You can also determine if your investment portfolio leans towards debt or equity, and if you have made a lot of investments in illiquid assets.