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When you see an advertisement about a diet, it usually doesn’t show the hard work behind the photo of the final result. The same could be said about optimizing your finances. Do you know how much is your income versus your expenses?
Before considering a budget, you may want to consider tracking your finances like tracking caloric intake for a diet. The first step to begin your financial diet is to learn the basics.
Your income is usually spoken about in a gross metric. Gross, for individuals, refers to your total pay before taxes, or other deductions such as health insurance or 401k contributions. The number that is more important to you would be your net income. Net income, for individuals, is your total income after taxes and payroll deductions.
Assuming that you are paid bi-weekly, take a look at the total on your pay stub and multiply that number by 26. This now gives you a calculation of your total net income in relation to your salary.
For hourly employees, I like to recommend using a pay stub that has no overtime hours unless you are guaranteed overtime in your position. Be sure to add any side-hustle income to the annual total as well.
Now that you have your total net income, let’s take a look at your expenses. Your highest expenses are most likely housing, transportation, and food. Gather a list of your transactions from last month for the categories listed below. If you don’t have a way of looking at your spending transaction history (Link to post about looking at statements), consider taking this list and writing down what you spend next month (link to simple budget spreadsheet or printout).
- Housing expenses: Mortgage payment (or rent), taxes, insurance, electric, water, natural gas, garbage, improvements, repairs, etc.
- Transportation expenses: Car payment, insurance, fuel, bus or train pass, etc.
- Food expenses: Groceries, meals out, coffee from the drive-thru, group lunches at work, etc.
The next most expensive categories are most likely going to be subscriptions, education, entertainment, clothing, gifts, and possibly vices. Let’s separate them into fixed and variable expenses.
Fixed expenses: cell phone, cable tv, internet, streaming services (Netflix), website memberships (Amazon Prime), health clubs, and any other monthly reoccurring bill.
Variable expenses: clothing, gifts, vices – alcohol, smoking, vaping, etc.
A few left unmentioned may include savings, investments, and business expenses. Anything leftover you may choose to categorize yourself or just create a miscellaneous or emergency category.
Now that you have your annual net income and a month of expenses, let’s calculate your average monthly and annual net totals.
Annual net total
(Monthly Net Income – Monthly Expenses) = Monthly Net total
Monthly Net Total x 12 = Annual Net Total
Don’t be afraid of the numbers you’re seeing! There’s possibly a chance that you’re negative and that’s okay because this is only the first step in learning about your own personal finances!
Check out some of the resources that we use for tracking our expenses!