Congratulations on completing Day 2! In Day 3 we will introduce you to a budget calculator, show you how to calculate your net income and start your list of spending envelopes for your spending plan.
The following checklist will assist you in keeping today’s tasks straight:
- Calculate your Net Income
- Use the Budget Calculator to see where you are spending your money
- Create your list of Envelope Spending Accounts
- Read Budgeting – Tips for Succes
Calculate your Net Income
The first thing we want to do today is calculate your net monthly income – it’s a fairly easy and quick process. Your net income is the amount of income that you 'take home' from each paycheck, after taxes and other deductions. Your net monthly income is the total that you take home each month.
Download your net monthly income worksheet and let’s get started! To calculate your monthly income, we need to first look at how often you get paid.
The most common pay periods are every two weeks, paid twice monthly, or paid weekly. These options apply to salaried individuals whose paychecks are a consistent amount for each pay period. (If you are paid on commission, or on an hourly basis, you will want to review the section on variable income a few paragraphs down.)
The following chart will help you to calculate your monthly net income based on the your pay schedule. Simply find your pay schedule in the left column to start.
Once you have determined your pay schedule, take the net amount of your paycheck and multiply it by the number of weeks shown in the chart. This will give you your net income for the year. Simply divide that number by 12 to calculate your monthly net income.
If you have variable income (commission based, hourly or an other wise changing amount for each paycheck) it is still easy to plan for your monthly income. You can either average your income, or select the least amount you expect to receive in a month.
If you go with the least amount, then you know that you will never overspend, as long as you make the minimum. When you have extra income, you can apply it to savings, debt reduction, periodic spending, etc.
If you go with the average method, simply take your last years’ income, or 6 months of the previous year, total it up and then divide by the number of months that you counted. Use this average amount for your monthly income.
Filling in the Monthly Net Income WorksheetNow that you know how to calculate the monthly net income, we need to do that for each income source that you and your spouse or partner if applicable, have. Simply enter in the "income source" column of the fixed or periodic net income areas.
- Fixed Net Income – Fixed income refers to income that you receive every month on a regular basis, such as your salary or wage.
- Periodic Net Income – Periodic income refers to income that you do not receive every month. This may be a bonus that you receive quarterly or yearly. Or if your ‘pay period’ is, for example, every two weeks, periodic income refers to the extra paychecks that you receive during the two months of the year where there is one extra pay period.
After filling in all of your income sources, the net amounts, and the pay periods, calculate the monthly and annual income. After making the calculations for each income source, total the fixed and periodic sections to get your total fixed net income and your total periodic net income. Next of course, you will calculate the monthly net income by adding the fixed and the periodic income totals.
Use the Budget Calculator
Now that you have your total monthly net income, we can start down the road to creating your balanced monthly spending plan. Let’s use the Mvelopes® Personal Online Budget Calculator to give you an idea of how much you are spending in each category and how that relates to not only your monthly net income, but also to the national spending averages. Click here to use the budget calculator.
Follow the steps through the Mvelopes Personal Budget Calculator and be sure to print out your results. Keep that report handy; we will use it today to create your list of spending envelopes for your monthly spending plan, as well as using it Day 4.
Create your list of Envelope Spending Accounts
Download the Spending Accounts Worksheet and we will get started on creating your personal list of envelope spending accounts for your personal monthly spending plan.
First thing we will want to do is identify the different type of envelope spending accounts that you will need. There are two types of envelope spending accounts— monthly and periodic.
Monthly envelope spending accounts are for areas of spending that have spending activity each month.
Periodic envelope spending accounts are for areas of spending that have spending activity only periodically—for example, quarterly or even annually.
Let’s first deal with the monthly envelope spending accounts, which can be either required or discretionary. Monthly required accounts include planned savings; car payments; and the minimum or planned payments for credit cards, mortgage payments, and the like. Monthly discretionary accounts include groceries, dining out, clothing, entertainment, allowances, and so on.
Next, let’s address periodic envelope spending accounts. As with monthly accounts, these can also be split into required and discretionary spending. Periodic required accounts include items such as property taxes, periodic insurance payments, annual auto registration fees, and the like. Periodic discretionary accounts include items such as gifts, vacations, house maintenance, holiday spending, etc.
Using your report from the Budget Calculator, start filling in the envelope spending account names that you will need for your spending plan. Place them in the appropriate category for monthly or periodic, as well as required or discretionary. The sample below will help you to classify all your expenditures and may also help you think of a few that may have been missing from the budget calculator.
Keep your list handy once you have completed your list of envelope spending accounts; We will transfer the list to the appropriate sections of the Monthly Spending Plan Worksheet in Day 4’s lesson.
Budgeting – Tips for Success
As we approach the end of the 3rd Day of the Money for Life Financial Fitness University Course, the following tips for success will help you stay focused on your goal of becoming financially fit. Let’s just take it one step at a time and you will be pleasantly surprised at how much you can accomplish in a very short period of time!
Don’t get discouraged! On average, people spend 10% more than they make. Don’t get discouraged if you do too. Stick with a spending plan and be committed to fixing the problem of overspending!
Be consistent. Put together a plan, track your expenses, compare your results and make adjustments. Do this every month.
Get everyone involved. At the beginning you may even want to have a weekly family meeting where everyone who spends money is together, reviewing the spending plan. Its critical for you and your spouse to work together but, why not start educating the kids about spending management too?
Learn to “Pay Cash”. Don’t rely on “credit”. If you don’t have the funds in your envelope, don’t make the purchase.
Avoid Department Store or other merchant credit accounts. People tend to spend more with these cards and they often have higher interest rates.
Use the Debt Roll-Down Principle to quickly eliminate debt. With this method, you will see fast results and stay motivated.
Congratulations on completing Day 3! In Day 4 we will learn how to create a balanced spending plan, review the Success Cycle, and read about how to manage, and overcome, the challenges with managing spending in today’s cashless society.
See you tomorrow!