Budget Basics: Know Your Income and Expenses

Some people love budgets and other people can’t stand them. Some people even go as far as to call budgets sexy (J Money writes at Budgets are Sexy) Regardless of which camp you are in they are in important tool for planning for your future. It can be difficult to figure out how to make your first budget so let’s start at the beginning.

Know What You Earn

In order to be able to properly budget it is essential that you know how much money you earn or bring in every budget period. To determine this keep track of every dollar that comes into your possession during your next budget period. Count your paychecks and any other regular money you expect to get consistently. This includes any rent from income properties, side gigs, pensions and every other dollar that hits your bank account, wallet or purse.

When you’re confident you’ve taken note of all of your income sources take a look and make sure you can reasonably expect this amount every pay period. If you work at an hourly job and worked 20 hours of overtime this month but have never worked overtime before and never will again you shouldn’t include that in your budgeted income number. Same thing if you sold some items around the house this month. Unless you plan on consistently generating the income you don’t want to rely on it on your budget.

Know What You Spend

Most people don’t have a problem with knowing how much they bring in a period but what they spend can surprise them. The smaller purchases can easily be forgotten and unless you keep track of all of your receipts you’re probably underestimating your spending. So what do I suggest you do?

As painful as some people make it out to be I suggest you keep track of every penny you spend. I’m not saying you’ll have to do this forever, but you at least have to get a good base line. To get this done you’ll need to do whatever works for you. I always get a receipt for EVERY purchase and put it in my wallet. When I get home I empty the receipts out of my wallet into a bin at home. I then record all of my receipts once a week.

What are some other ideas to record all of your expenses?

  • Enter them into a smartphone notepad whenever you pay cash or swipe a card.
  • Carry a small notepad and record your expenses there.
  • Ensure all expense are paid via a traceable method (credit card, debit card or any other traceable method).

Once you have a list of all of your expenses group them in like categories to find out how much you spend on various items throughout the period. Some ideas of categories include rent/mortgage, insurance (car, motorcycle, homeowner, flood, renter), car payments, car maintenance, gas, food, entertainment, utilities (electric, phone, cell phone, cable, internet) and clothing. This list can go on forever but make categories based on what makes sense to you.

After you have a solid idea of what you earn and what you spend you are ready for the next step. Creating a budget! Check back soon for the next steps in my budgeting process!

Do you know what your income and expenses are or would you have to do research and calculate it? Be honest!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I do know what they are but that’s mostly because I am also in love with budgets. And in all honesty, if you would have asked me this question a year ago, I would have had to go research it. Knowing what everything is really helps–it brings your eyes open to exactly how much you spend and don’t save.

  2. I constantly review my expenses every month. I find that many people think of their income as the gross they are paid! It is important to reorient yourself to think of your net (after taxes) paycheck. Knowing your earnings and expenses is real important!

  3. Tracking your spending is the most important part. I think most everyone knows how much income they make, but their spending habits altogether is usually a huge wake-up call to some people. I used Mint for budgeting and tracking my spending, but it was clearer and easier for me to write everything down in a notebook and review it weekly. I am not as stringent on myself anymore since I have played around with my budget for awhile now..but I will have to start all over again since I’ll be losing my income.

  4. Tranking your spending is important; working out income even more so. What I have found though is that the tracking of both income and expenses should be sufficiently detailed to allow analysis.

  5. I agree making a budget is useless if you don’t track your expenses and compare at the end of the month, especially if you’re married. Using cash or envelope system helps with tracking too.

  6. Yep, you can’t get more basic than this. Once people figure this out they will do a whole lot better. Nice post. Short and to the point.

  7. I definitely know what I make and spend, but probably only because I budget every week and create graph, trends, analysis and reports. I take this stuff way too seriously.

  8. My grandma kept track of every penny all her life. She kept little notebooks and would log everything. I like to think I “inherited” the ability to work with money from her. I used to keep track of every penny in Quicken. I broke everything down into categories, even groceries split out into dairy, junk, meat, vegetables, fruit, bread, pasta, etc. After doing that for a few years I got really burned out. Now I just withdraw cash and put “groceries” even if it wasn’t all groceries. Good sound advice.

    • I actually got a ledger book in college to keep track of the money my parents would give me for groceries. It was a good method at the time but now I know how to use excel.

  9. My wife and I actually JUST this month started to track every dollar we spend. I have a spreadsheet built that has the following columns: Business (where the $ was spent), Description, Category, Pay Source, Date, and Amount. I created a pivot chart off of this to show what we spend by category, a pie chart, etc. We wrote up a budget last month so we will compare spend vs. actual, and analyze it each month. I thought this would all just be a big hassle but I have really enjoyed it!

    • Good for you! If you ever find it becoming a pain there are some ways to automate it so make sure you at least have some way of getting the numbers. Excel is awesome if you know how to use it.

  10. We use Quicken to track everything and it works great. We always know where things are at. Plus it is great for generating reports so you can zone in on certain areas if you want.

    • Quicken is pretty good. I also use it and like inputting my receipts manually so I can keep track of them. PF nerd I know 🙂

  11. We know what our income and expenses are every month…pretty much down to the penny. The only variation is if my wife works overtime and on our utility bills.

  12. This is why I use Quickbooks. I track my spending pretty closely and can see where most of my money is going. It’s more realistic than a budget, per se, and helps me figure out where I need to cut back, etc. Thank goodness for online banking, I can track my spending and record it in my QB!

  13. Kevin Ashwe says:

    It does not matter how much you earn if you are not able to control your expensives and money leakages you will consistently be in the ‘rat race’.WATCH YOUR EXPENSES is the name of the game

  14. So important to monitor spending. It’s easier to know where to cut, if you know where your money is going. I’ve used Quicken for decades, and it works fairly well.

  15. Kelly@FinancialFreedomNewsletter says:

    Having a spreadsheet with all of the ways you spend your money for at least one month is the most enlightening way to see your expenses. Keeping track throughout the day of absolutely everything you spend your money on (even if it’s a dollar at the vending machine) and then inputting everything, will give you a great sense of where the little holes in your budget appear, and where you need to work to cut back on spending.

    • Totally agree. If you take 3 trips to the vending machine a day and get both a coke and a snack that hole can be a pretty big sized one for something you aren’t keeping track of.

  16. Finance Care says:

    Budgeting is the one of the most important thing in personal finance management. Monitoring spending as important as income.

    Thank you for sharing 🙂

    Regards,
    Peter

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