Successful money management comes from knowing your income and expenses. This means identifying how much money you have coming in and how you’re spending the money you have. Using these two factors, you can prepare for future expenses and determine where you can cut costs to save, invest or get out of debt.
Sources of Income
Income is typically derived from salary or wages, government benefits such as Social Security and investment income, gifts from family members or savings. Earnings frequently change and most people expect their earnings will increase over time the longer they are in the working world, gaining more experience and earning power. It’s important to remember that earnings may be variable which is one of the reasons that budgets are not set in stone.
Just as fast as income arrives, money goes back out to pay for products or services including housing, utilities, phone and internet, transportation—and that’s just basic monthly expenses. There’s also insurance, healthcare and childcare, credit card bills, groceries and clothing, among countless other things that chip away at income.
In addition to the outgoing funds to pay bills, expenses that should also be built into your budget—ideally figured as a percentage of your income—should be money set aside to build a savings account, grow an investment portfolio and plan for retirement.
Know Your Numbers
There are just a few steps involved in understanding your monthly income and expenses:
- Record your monthly income.
- List your fixed monthly expenses.
- Calculate non-monthly fixed expenses or bills that you pay every quarter, six months or annually.
- Compile a list of your variable monthly expenses.
- Compare what’s coming in with what’s going out.
The number you arrive at will determine your ability to spend on necessities, as well as on things you would like to have. If you don’t have enough income or if you spend more than you have, your cash flow will be negative, rather than positive.
Turning a negative cash flow into a positive one is the only way to lead a secure financial life and set the stage for a secure financial future. If you see that there’s a shortfall, there are two ways to reverse the situation:
- You can reduce your spending.
- You can increase your income.
It would certainly be ideal to increase your income but in reality, it’s a lot easier to reduce your spending to match the income you do have.
Creating a spending budget is a flexible, evolving process. It helps you draw a precise picture of what you have available to spend, compared with what you can afford to spend, along with what you’re actually spending. Having a practical budget helps ensure that your income and expenses exist in a balance that works in your favor.
Income and expenses can exist in harmony but it takes effort and commitment. A budget calculator can help you identify how much you are saving and spending on a monthly or annual basis, or experimenting with a budgeting formula, such as the 50/30/20 formula, may be helpful in creating a budget that works with your lifestyle.
Content provided for informational purposes only and should not be interpreted as legal advice on any subject matter.