How To Calculate Income Plus Expenses While Managing a Budget
Creating a budget is one of the most important steps you can take in order to get out of debt faster, though a high percentage of people know, only a select few take action.
What is a budget? A budget is an estimate of income and expenses for a set period of time. It estimates how much money comes in and how much is going out monthly. A good budget distributes enough money to cover expenses such as housing, food, transportation, and even allows for enough to be distributed to a savings account.
According to Debt.com, 32% of Americans maintain a household budget. In turn only 30% have a long term financial plan that includes savings and investment goals.
If you think a budget is keeping track of your spending solely in your head then you are headed towards a disaster. In this situation, you will find more of your money going out than coming in.
Let's discuss what a budget is not. A budget is not a means of telling yourself no to everything that costs money. Depriving yourself from spending outside of your monthly bills will only make you spend more later.
In a more simple term, a budget is an outline of where your money will go before you receive your next paycheck.
While having a budget won't protect you from emergencies, but it will help guide you through them easier than you would if you didn't have a budget. Unexpected car repairs, medical bills, or even home repair expenses can take your bank account down.
It is important to remember to be honest when you are creating your budget. Selling yourself short is one of the worst things you can do to yourself. A budget will only include the money that you KNOW you will receive such as your paycheck. Don't include the money that you loaned your friend just because you expect them to pay it back soon.
Have you ever taken a moment to write out a list of specific goals? Things like buying a house, making that new car purchase, or paying off debt. If so, this is the purpose of budgeting. You are telling your money where to go. It makes budgeting easier when you write it down and store it in a place where you will see it every day.
Still confused or don't know where to start? Let's look at an example:
Consider Brittany, 24 year old, mom of 2 and a take home pay of $2,500 per month. Her rent is $725 and she spends $400 a month for groceries. She enjoys taking the kids to the movies several times per month and also grabbing a coffee on the way to work each day. Movies and coffee alone costs her on average $150 monthly. Her expenses include a car, gym membership, and a student loans which all add up to be $795 per month. Let's not forget daycare expenses of $250 per week.
Brittany's expenses has an outflow of cash which amount to $3,070 per month. That is $570 more than what she brings home. She uses her credit to make up the difference of what she doesn't have. With a revolving balance each month, interest will continue to grow and take up even more of her income.
What Brittany should do is sit down and write out a budget plan. She should figure out where she can cut back and allocate what she cuts back to a savings account to create an emergency fund.
What should Brittany's budget look like?
$2,500 Rent $725
Car Payment $400
Gym Membership $30
Student Loan $365
$2,500 $3,070 Total
What We Would Suggest
We would suggest that Brittany cut back on going to the movies, make coffee at home, and cut out the gym membership. If she went to the movies once per month, made coffee at home or at work every day, excercise in her neighborhood then she could save $180.
How To Calculate Your Monthly Income
Take home pay is the only amount that you have to budget for. Pre-tax earnings do not count.
If you get paid a consistent amount twice per month- add up the amount of both paychecks and subtract it from your expenses.
If you are paid weekly- add up the amount of your take home pay for 4 weeks then subtract your expenses.
If your paycheck fluctuates- add up 3 months worth of income, divide by 3 then subtract your expenses.
Bonus money comes along twice per year in the form of an extra paycheck. Remember to save and spend wisely when this happens.
Compare Income and Expenses
Once you have added up all of your expenses, what do you see? A positive number (surplus) or a negative number (deficit)?
If you have a positive number, congratulations, you are living below your means!
If you have a negative number then this means that you should work on looking for ways to cutback. Instead of cable, consider Netflix or Hulu. Consider negotiate your credit card rates, spend less time eating out, or use lamps to save energy.
If you still feel overwhelmed with your expenses, try asking your boss for extra hours or find a part time job. In some situations, this is necessary.
Rule of Thumb: Your income should always exceed your expenses. Try keeping your expenses below 90% of your income.
You will not make your budget every month but this is why we suggest to adjust accordingly. You are not perfect, you are human, and unexpected things do happen.
Extra Budgeting Tips:
- Don't confuse wants with needs. You need to eat but you don't have to eat out. Cook at home.
- Watch your emotions. We tend to be emotional spenders. As women, we go on shopping sprees or nail trips when we feel overwhelmed. When you are feeling this way, find other ways to rid the bad emotions.
- Instead of credit and debit cards, try using cash. Unlike cards, once cash is gone, it is gone. There is no overspending.
- Manage your debt. If you have revolving credit card debt, use half of the money that you put in savings to put towards your balance.
- If you decide to consolidate your debt, consolidate with the intent to payoff and allocate towards another debt or savings account. It is within our human nature to consolidate then use the money that we are supposed to save to get back into debt.
- If you get a raise at work the put it towards your 401 K or savings account. Don't upgrade your lifestyle just because you got a raise.
Remember while budgeting may not be fun, it is necessary. It is a necessary tool to reach your goals in life. If you have any questions or concerns comment below. We will be more than happy to help you!