Understanding Your Income and Expenses

Understanding Your Income and Expenses

To create an accurate budget, you must understand your income and expenses. Many people think they know how much they are spending month-to-month on various needs, but without a proper understanding of how much is going into each type of purchase you make, it’s hard to create an accurate budget.

That’s why you must track your income and expenses on an ongoing basis. This will tell you exactly where your money is going. That knowledge may also help you decide better where you can cut back or save more. Here’s how to get started.

Tracking Your Income

The first step is to know how much money you have coming in each month. This could include any payment you receive, whether it is every week or just sometimes. Start by identifying all of the sources for your income, including employment, financial aid you receive, government support, investment income, financial support from family members, and so on.

Regular Income

Your regular income is any income you receive at a consistent level every month. The most common example of this is a paycheck. Even if the amount you receive each month is slightly different based on the number of hours worked, you’ll still want to track your regular income.

You may also receive other types of regular income, such as deposits from investments or government support programs like Social Security.

Irregular Income

Irregular income is any income that you typically receive that isn’t consistent. For example, you may get paid every few weeks to help out a friend, or you may have earnings from a passive source that you sometimes cash in. You may also receive irregular income if you do not work a routine job.

Irregular income is harder to budget for because it’s not consistent. When possible, base your budget on your consistent income and supplement it with irregular income.

Tracking Your Expenses

It’s also essential to track your expenses in the same way. Your goal should be to outline how much you are spending on anything, whether you stop for fast food or purchase gas for the car. No matter what it is, you’ll want to write it down.

You can do this with an app or a simple piece of paper. Write down anything you spend money electronically, with a debit card, or with cash.

Fixed Expenses

Your fixed expenses are the things you spend the same on each month. Here are some examples of this:

  • Your rent or mortgage payment
  • Insurance payments
  • Phone bill
  • Internet and cable services
  • Trash bills
  • Sewer bills
  • Installment loan payments

Keep in mind that sometimes your utilities can be put into this category if they are very close to being the same month-to-month. That could include water, electric, and gas costs.

Variable Expenses

Variable expenses are different. They are far more difficult to budget for because you have to consider how much they will change from one month to the next. Here are some examples of variable expenses:

  • Grocery bills
  • Gas, or charging for your car
  • Gifts
  • Clothing purchases
  • Credit card bills

With variable spending, it is more difficult to know how much to budget for each expense monthly. Look over the last two to three months, and determine the average amount you spent on that category. For example, how much did you spend each month on groceries? Determine the average amount and then utilize that as a guideline recognizing that more might be needed on any given month.

Discretionary Expenses

Discretionary expenses are any expenses you make that you do not have to pay. For example, it’s definitely beneficial to have subscription TV services, but you do not have to have them. Write down anything you spend money on each month that you could skip if you had to. Here are some examples:

  • Dining out
  • Streaming services
  • Coffee shop purchases
  • Items for the home that are not necessary
  • Leisure activity costs

Discretionary expenses can still be budgeted for (and you should do so if you are going to spend on them each month). Prioritize your fixed and variable expenses first, and then use what’s left to help cover the costs associated with discretionary spending.

The Importance of Savings and Debt Repayment

Within your budget, account for both debt repayment and savings. After all of your fixed and variable expenses are paid, you should pay yourself in both of these ways:

  • Savings: Aim to put a percentage of your income towards savings each month. Build an emergency fund and then work to save 3 to 6 months’ worth of expenses. Keep these funds separate from your checking account.
  • Debt repayment: Don’t just make the minimum payment on your credit cards and other loans each month but put a bit more towards them to pay them down. You may wish to focus on just one debt each month, paying off as much as possible with the amount you allot to debt repayment.

Understanding income and expenses like this help you to save money by providing you with more insight into your spending. Take the time to make this as accurate as possible.