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Income and Expenses

Making money, and spending it, is a part of everyday financial life.

Managing your money successfully relies on figuring out your income and expenses. This boils down to how much money you have coming in, and how you’re spending the money you have. Using those two factors, you can compare your resources with the amount of money you spend on a monthly basis and plan what you expect to spend in the future. It also allows you, if necessary, to determine where you can cut costs so you can save, invest, or get out of debt.

Sources of Income

In most cases, income comes from salary or wages, government benefits, such as Social Security, and investment income. You may also have savings to draw on or gifts from family members. But income can be variable, which is one of the reasons that budgets are not set in stone. Earnings in particular frequently change: Most people expect that earnings will increase over time the longer they are in the working world, gaining more experience and earning power.

Expenses

Just as fast as income arrives, money goes back out to pay for a seemingly endless list of expenditures, including housing, utilities, phone and internet, transportation—and that’s just basic monthly expenses. There’s also insurance, healthcare, and child care, credit card bills, groceries, and clothing, among countless other things that chip away at income.

In addition to the funds going out to pay bills, expenses that should be built into a spending plan are set amounts – ideally figured as a percentage of your income—to build a savings account, grow an investment portfolio, and plan for retirement.

calculator and notepad

The Numbers in Black and White

There are just a few simple steps involved in getting a handle on your monthly income and expenses:

  1. Record your monthly income.
  2. List your fixed monthly expenses.
  3. Calculate nonmonthly fixed expenses or bills that you pay every quarter or six months.
  4. Compile a list of your variable monthly expenses.
  5. Compare what’s coming in with what’s going out.

Your ability to spend on necessities, as well as on things you would like to have or do, depends on the number you come up with as the first step in this process. If you don’t have enough income, or if you spend more than you have, your cash flow will be negative, rather than positive.

Turning a negative cash flow into a positive one is the only way to lead a secure financial life and set the stage for a secure financial future. It is true that some reasons for negative cash flow may be beyond your control. But there are others that you should be able to avoid, like allowing variable and discretionary expenses to outstrip your income.

If you see that there’s a shortfall, there are two ways to reverse the situation:

  1. You can reduce your spending.
  2. You can increase your income.

It would certainly be handy to increase your income — though it would still be possible to have a negative flow with a huge income if you weren’t careful. But in reality, it’s a whole lot easier to reduce your spending to match the income you do have.

Creating a spending plan is a flexible, evolving process. It helps you draw a precise picture of what you have available to spend, compared with what you can afford to spend, along with what you’re actually spending. Having a practical spending plan helps ensure that your income and expenses exist in a balance that works in your favor.

Income and expenses can exist in harmony, but it takes effort and commitment.

Illustration: Cristi Cash
Article Source: https://soopercu.learnbanzai.com/articles/income-and-expenses

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