Red/Black Exercise

Are you familiar with the concept of a profit and loss statement?

It is a way to documenting how a business has performed over a period of time. For instance, that time period can be a month or even an entire fiscal year. The idea is to account for the total revenues and expenses for the business and see if you ended with profit or a loss. Especially for new business owners, this can be quite eye-opening.

I encourage my clients to do a similar report each month on their personal expenses. Did you end the month with more spending than income or is there money left over? Is your ledger in the red or in the black?

The process for this is pretty straightforward. Start with the income you had in total. Then, go down your budget, where you have been tracking your expenses, and start subtracting all the money that you have spent in each category. If you have a regular savings budget item or a sinking fund, subtract the amount you have allocated instead of what you have spent. This way you accurately reflect that you saved money for that category and don't have it available at the end of the month.

Once you have subtracted the last expense, look at the number left.

If it is negative, you are in the red and likely have some budget or behavior adjustments to make.

If it is positive, you are in the black and have kept money in your household!

I encourage you to try this out for the next three months. Here is a list of steps you can do to start this as a new habit:

  1. Set a new calendar appointment for the first day of each month.

  2. On that day, gather your budget and begin subtracting your expenses from your total income.

  3. Determine if you are in the red or in the black for the previous month.

  4. Adjust the current month's budget if necessary.

What did this exercise reveal to you?