Keeping track of your earnings and expenses is generally a great idea. You may say that people who have a lot of money don’t need to calculate their expenses since they are rich, but that’s where you are wrong. Accounting is one of the best ways to have sound relationships with your finances.
So, keeping track of the things you spend your budget on, and how much you still have after paying for everything is generally a great idea. But it’s even more important to keep track of your finances when you are investing in something. If you keep investing, but you don’t seem to get any significant profit, is the first red flag.
Instead of hoping for the best, calculate your expenses and earnings to see whether it’s still worth investing, or perhaps you should withdraw your money. Read this article to learn more about ways of keeping track of your earnings.
How to Calculate Profit
Whether you are investing or having a business, calculating profit is a must. Profit means the success of your investments or business, so without knowing whether you are successful or not, you can’t make any positive improvements or optimizations.
The general profit formula is:
- Profit = Total Revenue – Total Expenses
It’s important to note that total expenses may include direct and indirect expenses. For example, if you own a coffee shop, your direct expenses are the costs of all the products that you buy, whereas spending on ads, rent, taxes, etc., are the indirect expenses.
Let’s say, your coffee shop has earned 300.000 dollars in a year. You have spent $50.000 on products, $40.000 on rent, $30.000 on taxes, so the Total Expenses = $50.000 + $40.000 + $30.000 ($120.000). Meaning, the Profit = $300.000 – $120.000 (180.000). But that’s only if supposedly your family owns the coffee shop and only family members work there. If that’s not the case, the formula should also include salaries.
The same formula can be applied when calculating your earnings from investing in something. For example, you have invested 1.000 dollars in a gambling online platform. One year later, you get 3.000 dollars, so what is your profit in this case? $3.000 of total revenue – $1.000 of expenses = $2.000. The formula may change if you need to pay taxes for the money you’ve earned when investing.
Conclusion
Generally, it’s extremely important to keep track of your earnings and expenses, otherwise, you won’t be able to tell whether it’s worth making some changes to improve your income.