Every time I hear the phrase “living paycheck to paycheck” it makes my ears hurt. There are so many things wrong with this phrase for so many reasons. I can’t help but want to ask a series of follow-up questions, such as how much money is being made and what is it being spent on? Please, understand I am not being judgmental. Right now, there is a major debate in this country about people being able to earn a wage that allows them to live a decent life. I fully understand that trying to make ends meet can be difficult. However, I do think there are things that can be done so that people can start to break the paycheck to paycheck cycle. I want to help you create and manage your monthly budget. Before we do that, we need to evaluate your financial state.
Calculate your monthly income
First, figure out exactly how much money you make and/or receive each month. This is a fairly simple process. If you work the same number of hours each week or you are salaried, add up the net amount of your paychecks for a month. The net amount is the actual money that you receive after taxes and any other payroll deductions you may have. If you are paid hourly and your hours worked fluctuate each week, use three months of pay stubs. Add up the net amount of all the paychecks, then divide by three. This should give you a good estimate of the amount of income from work you can expect to have on a monthly basis. Also consider any money that you rely on from sources other than a job. This could include funds from a Social Security check, disability check, alimony or child support.
Calculate your monthly expenses
Once you have calculated your monthly income, make a list of all the bills that you pay on a monthly basis and the amount you spend on each. The list should include expenses such as your monthly mortgage or rent, car payment, electricity, water, credit cards, cell phone, etc. No bill is too small. If you pay $15 a month to have the paper delivered to your house, include that as well. For utilities that fluctuate such as gas and electricity, take a six month average of what you pay. Add up the total bills for six months and then divide by six. Use this number as your monthly amount. Personally, I like to include food and gas for my car as part of my monthly expenses. I include them because they are necessities that I spend roughly the same amount on each month. However, since they aren’t actual bills, for this exercise it is your choice to include them or not.
Determine your disposable income and what to do next
Now, that you have your net income and monthly expenses, you can determine your disposable income. Disposable income is money that you have left to spend on whatever you choose. Subtract your monthly expenses from your net monthly income and the amount left is your disposable income.
Below is a sample chart of an income and expense comparison.
|Income Source||Monthly Amount|
|Net Bi-weekly paycheck-$1500||$3,000|
|Monthly Income-Monthly Expenses||Disposable Income|
|*This example does not include food or gasoline, because they aren’t fixed debts. Include them if you want a more precise representation of your disposable income.|
Now that you have this very important information, how do you feel? Are you surprised, shocked, happy or was it what you expected?
If your net income was lower than your monthly expenses, you have no disposable income. You are in a deficit each month and living above your means. A deficit is the amount by which something, especially a sum of money is too small. You need to review your expenses and figure out which ones can be reduced. Target the expenses that are luxuries and figure out how you can cut back. For example, if you are paying for the premium cable package discontinue service or at the very least downgrade.
If you fall into the category of having some disposable income but not as much as you would like, go through the same exercise. If you conclude there aren’t areas where you can cut back, then you need to focus on ways to increase your income.
Finally, if you are pleased with the amount of disposable income that you have, congratulations on being a good steward of your finances. Creating a monthly budget can still be beneficial to you. A budget is a plan about how you are going to spend your money. It is important you have a plan to help you achieve personal financial goals.
In my next post I will give details and instructions on how to create a monthly budget that will work for you. My hope is that the information I have supplied was helpful and just the first step in our journey of making your finances simple!