Income and Expenses

Income and Expenses

Protecting a good investment and making money concept

What is income?

Income is the money that you make.

There are several sources of income. The most common form of income is the paycheck you receive from your employer, usually either a weekly or biweekly basis.

However, there are other forms of income besides a paycheck. Some other common forms of income include:

• Child Support

• Alimony

• Unemployment Benefits

• Interest Income

• Dividend Income

• Rental Income

• Social Security Disability Income

• Self-Employment Income

• Bonus from employer

In order to successfully create a budget, you should be aware of how much money you make on a monthly basis. Your monthly income is the amount of money you make or expect to make on a monthly basis.

The two forms of monthly income are gross monthly income and net monthly income.


Gross monthly income is the amount of income you make on a monthly basis before paying federal income taxes, social security taxes, Medicare taxes, state income taxes, and county taxes.

Hypothetical example: Jon works for ABC Company and makes a salary of $24,000.00 per year. Therefore, Jon’s monthly gross income is $2,000.00. This figure is obtained by dividing $24,000.00 by twelve (12).

Hypothetical example: Stacy works for XYZ Company and makes a salary of $36,000.00 per year. Therefore, Stacy’s monthly gross income would be $3,000.00. This figure is obtained by dividing $36,000.00 by twelve (12)

When you make a budget, you may not want to rely on your gross income because you do not get to keep all of that money… you have to pay federal income taxes, social security taxes, Medicare taxes, state income taxes, and county taxes. Therefore, it may be better rely on your net income.

In addition to federal income taxes, social security taxes, Medicare taxes, state income taxes, and county taxes, the following is a list of common mandatory deductions many people have abstracted from their pay checks:

• Child support

• Alimony

• Wage garnishment

Once all of the taxes and other deductions are subtracted from your paycheck, you are left with a dollar amount that your paycheck is actually for, this is your net income.

 

What is net monthly income?

Net monthly income is the money that is left over after your federal income taxes, social security taxes, Medicare taxes, state income taxes, county taxes and any other deductions are subtracted from your gross monthly income.

For individuals receiving checks from an employer on a weekly or biweekly basis, your net income would be the amount of money that your check is actually for.

Hypothetical example: Sam makes a salary of $24,000.00 per year. Sam’s only source of income is his paycheck. Therefore, his gross monthly income is $2,000.00 per month. Sam receives a paycheck twice a month. Therefore, Sam grosses $1,000.00 each paycheck. However, as you are aware, Sam does not get to keep the entire $1,000.00. Instead, he has the following amounts of money taken out of each one of his checks:

Federal income tax: $133.28
Social Security tax: $62.00
State Income tax: $68.00
County Income tax: $18.00
Total taxes deducted from each paycheck: $281.28

What would Sam’s biweekly net income be?

You calculate Sam’s biweekly net income by subtracting his gross biweekly income of $1,000.00 from the $281.28 in taxes that are deducted from each one of his pay checks.

Gross biweekly income: $1,000.00
(taxes taken out of biweekly check): -$281.28
Biweekly net income: $718.72

Since the actual amount Sam receives from his paycheck every two (2) weeks is $718.72, his monthly net income would be $1,437.44.

Hypothetical example: Sue makes a salary of $36,000.00 per year. Sue’s only source of income is her paycheck. Therefore, her gross monthly income is $3,000.00 per month. Sue receives a paycheck four (4) times a month. Therefore, Sue grosses $750.00 per paycheck. As you know, Sue does not get to keep the entire $750.00. Rather, she has the following amounts of money taken out of each of her checks for taxes:

Federal income tax: $104.14
Social security tax: $46.50
State income tax: $25.50
County income tax: $22.00
Total taxes deducted from each paycheck: $195.14

In addition to having taxes deducted from each of her paychecks, Sue’s employer also garnishes $25.00 from each one of her paychecks because of a judgment entered against her for an outstanding credit card bill she failed to pay.

How would you calculate Sue’s weekly net income?

You would calculate Sue’s weekly net income by subtracting the $195.14 she pays in taxes each week and the $25.00 she makes in garnishment payments each week from her gross weekly check of $750.00.

Gross weekly income: $750.00
(taxes taken out of weekly check): -$191.14
(garnishment payment each week): – $25.00
Weekly net income: $533.56

Since Sue receives a weekly check in the amount of $533.56, her monthly net income is $2,134.24.

If you create a monthly budget, you should probably base it on your net monthly income since it is the amount of money you actually bring home each month.

Knowing what your net monthly income is the first step in being able to create a monthly budget.

 

What are expenses?

Expenses are outflows of money to another person or group to pay for an item or service.

Think of it this way. An expense is money that is going out the door.

There are several types of expenses that you can expect to incur on a monthly basis.

 

The following are examples of types of monthly expenses that you may incur:

• Mortgage payment if you own a house

• Rental payment if you rent an apartment or house

• Food

• Gas for your vehicle(s)

• Utility bill

• Cable bill

• Land line phone bill

• Cellular phone bill

• Car insurance

• Home insurance

• Health insurance

• Dental insurance

• Student loans

• Credit card(s) bill(s)

• Internet bill

• Water bill

• Entertainment

• Child support

• Alimony

• Car loan

• Lease payment for a vehicle

 

In order to successfully create and manage a budget, you should have a good understanding of what you expect your monthly expenses to be. You also need to try to make sure that your net monthly income is enough to pay for your expected monthly expenses.

Your monthly expenses can be broken down into three (3) categories which include: 1.) fixed monthly expenses, 2.) variable monthly expenses and, 3.) periodic monthly expenses.

-> What are fixed monthly expenses?

Fixed monthly expenses are expenses that you incur every month which are for the same dollar amount, month after month.

the following is a list of some of the fixed monthly expenses that you most likely have:

• Mortgage payment if you own a house

• Rental payment if you rent an apartment or house

• Car payment if you have a loan for the purchase of your vehicle(s)

• Lease payment on a vehicle(s)

• Credit card(s) payment

• Cable television bill

• Land line phone bill

• Cellular telephone bill

• Student loan payment

• Car insurance

• Home insurance

• Health insurance

• Babysitter bill

• Internet bill

• Gym membership

If you are like most people, you have several fixed monthly expenses.

Fixed monthly expenses will probably be the easiest type of expenses to budget for because you know you have them every month and you know the exact dollar amount of each fixed monthly expense.

 

What are variable monthly expenses?

Variable monthly expenses are monthly expenses that you incur every month that vary in dollar amount.

To put it another way, variable monthly expenses are expenses that you know you have every month. However, you do not know the exact dollar amount of what the expenses will be

The following is a list of some variable monthly expenses that you probably have:

• Utility bill

• Water bill

• Grocery Bill

• Gas for vehicle(s)

• Entertainment

 

Some of your variable expenses will fluctuate more than others. For example, when gas prices are $4.00 per gallon, you are presumably going to spend a lot more money, per month, on gas than if gas were $1.65 per gallon. In addition, your utility bill is probably going to be much higher in the winter months, as opposed to the spring, summer and fall months of the year. On the other hand, your water bill and grocery bill, even though they will vary in amount each month, will be more predictable and will not fluctuate as much.

You probably do not have as many variable monthly expenses as you do fixed monthly expenses. 

Examples of ways to cut back on your variable monthly expenses include:

• Turning down the heat in your residence during the winter months

• Minimizing use of the air conditioner in your residence

• Turning off lights in your residence if you are not using them

• Taking shorter showers

• Spending less at the grocery store by buying generic items

• Using coupons at the grocery store

• Walking or riding a bike on your short trips instead of taking your vehicle

• Car-pooling

• Dining out less often during the month

• Ordering less expensive items when eating out in restaurants

• When dining out, ordering ice water instead of more costly beverages

 

 

As you can imagine, you should be able to cut back on some of your monthly variable expenses with a little discipline. Give it a try and good luck!

 

What are periodic monthly expenses?

Periodic monthly expenses are monthly expenses that you incur on a non-regular basis.

In order to successfully create and manage a budget, you should try to anticipate and identify what your periodic monthly expenses may be. In addition, you need to try to plan and save in advance for upcoming periodic monthly expenses

 

The following are examples of periodic expenses that you may incur during the course of a year:

• Car repairs

• Paying $200.00 every spring for your son to play in a basketball league

• Gifts for family members and friends.

• Paying $100.00 every May for your daughter to play on a summer softball team.

• Back to school expenses for your children

• Paying $75.00 every January, for your annual dues, in order to keep your Elks Lodge membership active.

• Medical expenses

• Vacation(s)

• Unexpected house maintenance expenses 

 

Out of the list provided earlier, the following would be classified as unexpected periodic expenses:

• Car repairs

• Medical expenses

• Unexpected house maintenance expenses

Out of the list provided earlier, the following would be classified as expected periodic expenses:

• Paying $200.00 every spring for your son to play in a basketball league

• Gifts for family members and friends

• Paying $100.00 every May for your daughter to play on a summer softball team

• Back to school expenses for your children

• Paying $75.00 every January, for your annual dues, in order to keep your Elks Lodge membership active

• Vacation(s)

 

Many of your periodic monthly expenses are going to be quite expensive. You need to be prepared financially for both your expected and unexpected periodic monthly expenses.

One way to budget for your unexpected periodic monthly expenses is to calculate the total amount of them from the past twelve (12) months. Realistically, you probably will not be able to remember every single one of your unexpected periodic expenses from last year, but do the best you can. Hopefully, you will remember the more expensive unexpected periodic expenses you had during the past twelve (12) months.

Once you calculate the total of your unexpected periodic expenses for the past twelve (12) months, divide that total by twelve (12). That number will be the amount of money you should budget each month for your unexpected periodic expenses going forward.

 

Once you calculate the total of all of your monthly expenses, your net monthly income should be at least as much as your total monthly expenses.

If your net monthly income is not as much as your total monthly expenses, you need to find a way to reduce your monthly expenses. Alternatively, you need to find a way to increase your net monthly income. It is probably easier trying to find ways to reduce your monthly expenses, than finding ways to increase your net monthly income.

 

Once you have created a written budget, you should keep track of how you are actually doing compared with your written budget. It will be tempting to create a written budget and then not keep your spending in line with the budget. Do not fall into this trap! If you are disciplined and keep your spending in line with your budget, your financial well-being should be much better off. Good luck and get started!


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