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Income & Expenses

Want a Better Budget? Understand Your Income and Expenses

Trouble with your income & expenses?

Are you having trouble keeping track of your income and expenses each month?

Are you constantly overspending and taking on more debt?

Have you considered using a budget?

The “B” word (budget) can conjure a number of negative thoughts and assumptions. Words like “rigidity,” “deprivation,” and “limitation,” might come to mind. While budgets might have a bad rap, the intention is good. A well-designed budget can create awareness, motivation, and a sense of control. The purpose of a budget is to help you improve your financial situation.

While budgeting can seem intimidating or overwhelming, it’s a great way to gain an understanding of where you are financially. We sometimes avoid budgeting because we’re afraid of what we will find. Better to hide from reality than face the facts. It may be a case that we haven’t learned about budgeting or personal finance.

If you didn’t grow up with money-savvy parents or go to school to get an accounting degree, then you might have never learned about budgeting. Or, perhaps you’re aware of budgeting but your sporadic income as a freelancer makes it difficult to stick to a budget. Wherever you are in your personal finance journey, a budget can help.

The Purpose of a Budget

A budget is a document that outlines how much money you make (your income) and how much money you spend (your expenses). It’s typically used over a specific period of time (often monthly or annually). You can think of a budget as a plan for how you want to use your money. Rather than getting a paycheck and spending it haphazardly, a budget helps you to keep track of your hard-earned dollars.

A budget doesn’t have to be about limitation or deprivation. Instead, it’s a tool that you can use to ensure you are prioritizing where your money should go, allowing you to plan for the financial future you want. A good budget can help to reduce your money-related stress, pull you out of debt, and get you back on track financially.

Budgeting Basics

The two main pieces of financial information you need when creating your budget are a list of your income and expenses.

Income Definition

Your income includes all of the sources of money you bring home each month. This can be money you earn at your day job through hourly wages or salary. Or, it can be money you earn doing a side hustle or part-time gig. It also includes any money you make from investments in stocks or bonds, as well as real estate. If you collect spousal or child support, this also counts as a form of income. For retirees, your pension or investments are included as income.

When creating a budget it’s important to get an accurate estimate of how much money you bring in each month. This will give you an idea of the amount you have available to spend on day-to-day expenses.

Expenses Definition

Your expenses include all of the things you spend money on. Expenses can be broken down into two main categories — discretionary and non-discretionary.

Discretionary expenses are the costs that you accumulate when shopping in stores or purchasing services. Discretionary expenses can include eating out, furniture, or money spent on entertainment.

Non-discretionary expenses can be thought of as your mandatory expenses. These are the household costs that you have to pay each month such as monthly spousal support payments, child care costs, or vehicle payments.

An easy way to think about discretionary and non-discretionary expenses is to frame them as wants and needs. You go out for dinner and spend money at a restaurant because you want to. However, when it comes to paying your rent or mortgage, this is something you need to do.

How to Use Income & Expenses When Creating a Budget

To build a budget that really works, you need to understand your income and expenses in detail. To gain a clear picture of your current financial situation, start by calculating your net income and expenses. You can use this fillable income & expenses worksheet to start tracking your money.

Calculate Your Net Income

Your net income represents the amount of money you bring home after taxes. As previously mentioned, this can include income from employment, pension, child support, employment insurance benefits, or self-employment income. Once you account for all of your income sources, you will need to add everything up to get your total net amount.

Calculate Your Expenses

The next step is to calculate your expenses. This calculation will help you determine where all of your money is going each month. You can break your expenses down into discretionary (wants) and non-discretionary expenses (needs). This exercise can be very eye-opening. We may be surprised to find that where we think we are spending our money and where we are actually spending our money don’t always align.

Calculate the Difference

Now that you’ve determined your net income and expenses it’s time to calculate the difference. You want to subtract your total expenses from your total income to see the difference between the two.

Income Total – Expenses Total = Difference

If your calculation results in a negative value, this means that you are spending more money than you make. In other words, you don’t have enough income to cover all of your expenses. If this is the case, don’t fret.

Identifying where you’re at is the first step in turning around your financial situation. While it doesn’t feel good to see a negative number on the page, now you know that you need to take action and you can start to do something about it.

Cut Your Discretionary Expenses

To reduce your expenses, you can begin by going through your discretionary costs line by line and making cuts. You want to be ruthless in your assessment of what goes. Question everything.

  • Do you really need to buy more clothes, or can you make do with what you have…at least for now?
  • Is it necessary to pay for three different streaming services each month or can you get by with one, or none?
  • Can you stop eating out and cook at home more often?

When you are contemplating a cut remember, this isn’t necessarily permanent. But, the more you can cut now, the quicker you can get your finances back on track.

Reduce Your Non-discretionary Expenses

The next step is to review your non-discretionary expenses. These expenses can be harder to reduce than the discretionary expenses but there is still an opportunity to save. Continue to question your expenses.

  • Can I buy more groceries on sale or shop at a cheaper grocery store?
  • Can we sell one of the cars and manage with just one?
  • Can I take public transit to save on gas and other car expenses?

Try to get creative and remember why you are doing this. You are trying to create a brighter financial future for you and your family. While it may be challenging now, your future self will thank you.

Make More Money

Cutting is not the only way to close the gap between your income and expenses. You can also focus on trying to bring in more money. Starting a side hustle in your free time or getting a part-time job to supplement your regular income can help you get a head start on improving your finances.

No matter who you are, everyone has at least one skill that someone else is willing to pay for. Make a list of your skills and interests and see if you can come up with a few potential side hustle ideas. If you’re stuck, ask your friends and family members what you’re good at. Or, think about what you do in your day job. Is there an opportunity for you to do some consulting or freelancing on the side?

In this podcast, John Adamson talks about the importance of creating a budget so that you can make better financial decisions.

Ask for Professional Help

If you are struggling to manage your finances there is professional help available. There is no shame in asking for assistance. Remember, unless you’ve been trained on how to create a budget or manage the ins and outs of your personal finances, it can be challenging.

If your income is less than your current monthly expenses, or if you’re close to netting a negative number, call Adamson and Associates to explore your options.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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