Essentials of Finances Part 1

The beginning of any financial plan will begin with two things: income and expenses.  If you want to be intentional with your finances, it all starts with these two items.  I will begin with income, because that is what enables you to spend money.  Even though the current deficit-spending mentality is so rampant, you cannot spend money before you have it.

Money Coming In

Understanding your income is very easy to do.  Begin by looking at your pay stub.  I recommend reviewing your net income as opposed to the gross amount.  The net income is how much you make after taxes (federal and state), social security, and all the other fees.  If you are paid monthly, it is easy to calculate how much you earn for that month.  If you are paid weekly or bi-weekly, simply add up the net income for your current month.  You have already figured out how much money you have to spend.

Money Going Out

Expenses are not as easy to determine as income.  If you are looking to save money, you will need to determine which expenses are required or mandatory and which ones are optional.  The major difficulty that people face in managing their finances is misclassifying an expense as mandatory or required when they are really optional.  For example, a good friend of mine would almost certainly classify his cappuccino from the local coffee shop as mandatory, but most of us understand this is not the case.  Some examples of mandatory costs are: housing, transportation, insurance.  Optional expenses would include: entertainment, eating out, etc.  It is also important to point out that even what I have deemed mandatory costs are flexible as well.  For example, if you determine that you are spending too much for housing, you can always move to a smaller house or apartment to save money.  These are classified as mandatory because they are often unavoidable costs.

An easy way to figure out how much you are spending on a regular month is to track your spending for a month or two.  Some people suggest writing down every expense when it you pay for it.  While I usually prefer to use my credit card for everything (and then use my credit card statement to review my spending), for the time being, I will suggest simply writing everything down.  If you want to reap the benefits that credit cards offer, read my article, How to Use Credit Cards to your Advantage.

Cash Flow (Income – Expenses)

Once you determine your expenses, subtract that from your income.  If you are spending more than you make, there is a problem.  If you are spending less than you make, you are in a great starting place to begin analyzing how to save more money.  In either position, anyone can significantly improve their finances by recognizing their current income-to-expenses comparison.  If you have figured out these two things, you have already accomplished the first step in managing your finances.

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