Perspectives on Income and Outgo
Nickel, author of the Five Cent Nickel blog, was guest authoring on the Get Rich Slowly blog about starting & raising a family on a budget and he made the following comment:
Debt’s a funny thing in that it’s both a byproduct of and a contributor to living beyond your means.
This simple sentence caught my attention because it has perspective. The credit card companies want you to have the perspective that credit cards extend your means. They do if you consider debt to be mean, and I do. What is your income? What is your outgo? Do you justify your expenses by need or by want?
Determining Your Income
Determining your income should be pretty straight forward. Your income is the amount of money you receive from an employer or from commissions after taxes have been taken out or set aside. If you get one paycheck from one place every two weeks, or twice a month then your income is more than likely that amount. Assuming you have your withholding configured appropriately at your employer you should be able to determine that value with ease. If you’re self employed, a contractor or have multiple incomes from multiple sources (like buying & selling on eBay.com, or Amazon.com). At that point in time you may find it incredibly helpful to maintain a spreadsheet of your income, or use software such as Quicken to track your income (and outgo). Most banks allow you to download your financial records online to be imported by your financial tracking software.
I’m a contractor so in my case I have to calculate what my quarterly taxes will be given a constant pay cycle (which fortunately I have) plus any side jobs I may get (which fortunately I have), and then the left over amount is my income. Because taxes can vary by income and from state to state it is outside the scope of this blog post to go into the nitty-gritty details. You will probably want to hire an accountant if you run into the need to manage a complex multi-income budget.
Determining Your Outgo
Outgo is the money you spend out of the amount that you had as income. Hopefully. In the case of a person who is living beyond their means, this is a pretty important step to calculate! Figure out all of your outgoing bills that are constant. The outgo is the sum of your bills and expenses for the month. Now, the tricky part is figuring out your yearly bills such as car registration, drivers license fees or whatever state or local fees you may face that are tied to an annual cycle rather than a monthly cycle. Divide those yearly bills by 12 to calculate what you’d need to set aside monthly. The total mount that you have to set aside or pay monthly will be your outgo.
Determining Your Means
To determine your means calculate your income and then calculate your outgo and subtract the outgo from the income. For example:
Income: $3,000.00
Outgo: -$2,500.00
Means: $500.00
But that’s just the rudimentary stuff. You’ll want to budget money for saving and investing for retirement. That could take up the rest of the $500.00 or you may choose to do something else and split up the $500.00 to put some aside for retirement, and some aside for spending money. Before you jump on the spending bandwagon you’ll want to figure out your retirement needs and set investment goals.
Bonus Tip
Take any money that you would have put into a normal savings account for annual bills and put that money into a high interest savings account along with your normal savings chunk - it’ll help you eek out just a few more dollars!
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