With two young children, my tolerance for things being out of control is constantly challenged. There are messes and clutter in every room of the house. The dresser drawers lose their organization just minutes after I put away clean clothes. Most days feel like I spend the majority of my time chasing after things I cannot control. That’s why working on my budget is relaxing – because it allows me to dive into something I can control. We may not be able to control every dollar that comes in or out of our accounts but we can control how we track our money. In our last post, we discussed the different types of expense – Fixed, Period and Variable. Today we are going to talk about another part of budgeting – Income. Before you can create an effective budget you need to know what income you have to work with.
Gross and Net Income are critical terms you need to know. Gross Income is your income before any deductions have been withdrawn. This is typically an hourly rate times the number of hours you worked during a pay period. Net Income is what’s left over after all deductions have been taken. There can be significant differences between Gross and Net Income so it is important to understand all of your deductions. You can influence the amount of deductions by making adjustments to areas such as tax withholdings, life, and health insurance coverage, charitable contributions or automatic saving plans. You should periodically review your elections with your employer’s HR department. You can also visit the IRS website to learn about your tax withholdings. When you are trying to improve your financial health, you should make sure you don’t have excessive or duplicate deductions.
Monitoring and understanding your gross and net income is also important if you are self-employed. Your gross income will be any earnings you bring in. From your earnings, you will need to estimate taxes and account for other expenses, such as health insurance premiums, to determine your net income.
Once you have calculated your Net Income, you can determine how much of it is considered Disposable Income. This is the money required for necessary living expenses, such as food, housing, utilities, clothing, and transportation. What if your net income from your current employment is not enough to cover necessary living expenses? This is a stressful situation that many of us have or will face. If you are facing this kind of challenge, our financial advocates are here to assist you.
Gaining Additional Income
There are two things you can do to get control of the situation. First, you can explore options to gain additional income. Are you an hourly employee that can work more than 40 hours a week to earn some overtime pay? Perhaps you can pick up side work that fits your skills and lifestyle. Some side jobs are very flexible such as Uber or Lyft. Others can be more regular like a caretaker or retail position. Perhaps you have a talent for making something that you can sell on a site like Etsy. The current virtual marketplace makes it easier than ever to find a side gig and earn some extra cash.
If you do not have enough Disposable Income you can explore ways to reduce your expenses. All of the three types of expenses, fixed, periodic and flexible, have some room for reduction. Understanding all of your expenses will help you find areas that can be reduced or eliminated.
Once you have determined your Disposable Income and reduced it by your living expenses, with the remaining amount is your Discretionary Income. This money can be used for recreational expenses such as travel and entertainment. Having discretionary income is what we should be striving for – for the income we have to exceed the income we need.
Understanding both your income and expenses is the first step in setting up your budget. In our next post, we will review practical ways to build your budget. But you don’t have to wait for the post to get started. Our financial advocates would love to meet with you to help you understand your income and make the most of it. Call us today to set up a free financial review and develop a budget that can transform your life.