The first step in creating a spending plan is to figure your income. Figuring out how much you earn in a year can be easy or tricky depending on how you’re paid. If you earn a regular salary or work a set number of hours per week, the task is easy — just multiply your regular pay by the number of pay periods in a year.
On the other hand, if you earn commissions or tips or if you’re, say, a fisherman or a landscaper, you need some basis on which to project your income. Perhaps your work is seasonal (you prepare tax returns, for example) and you bring in more income at certain times of the year, or maybe you work extra hours at inventory time and that affects your income.
Look at last year’s income as a starting point. Your old tax return should have most of the information you need.
Whatever your situation, try to estimate a year’s worth of income. If you find it helpful to come up with a monthly average, start with a high-earning month rather than a low-earning one. That way you can save some of that month’s extra income to tide you over in a low-income month.
Use the income worksheet to list all the sources of income you expect each month. Be sure to use your take-home, or net, pay rather than your gross pay (your salary before taxes and other deductions).
For example, if you earn $60,000 a year, your gross income is $5,000 a month — but you probably take home about $3,600 after Social Security, federal and state taxes, and other deductions. You may also want to list the expenses that are deducted from your paycheck. Be sure to consider ways to reduce or eliminate deductions.
| Source of Income | Planned | Actual | Difference |
|---|---|---|---|
| Salary 1 | |||
| Salary 2 | |||
| Bonus | |||
| Interest | |||
| Dividends | |||
| Other periodic income | |||
| Child support/alimony | |||
| Rental-property income | |||
| Gifts | |||
| Deduction changes/other | |||
| Total Income | $ | $ | $ |
For income items that are uncertain, use the Planned column. Put a value you know you can count on in the Actual column and then record the Difference as you receive payment. If an amount in the Difference column is bigger than you feel comfortable with, you may want to pare down your Planned number.
Here’s an example: Your current (Actual) take-home pay is $4,000 a month. In a few months, you expect a 10 percent raise, which takes it to $4,400 (Planned). The Difference is $400. If the raise doesn’t come to pass, ask yourself if your plan will work without the extra $400 in income.
Many people over-withhold for taxes. If you got a $2,400 tax refund last year, that money was an interest-free loan to the IRS that you could have put to better use. Reduce your withholding by half the amount of your refund. For a $2,400 refund, you’re overpaying $200 a month in taxes. Reduce your withholding by $100 a month. That still leaves you a cushion with the tax man..
You may have income from other sources besides your regular paycheck. Don’t forget to include child support, alimony, overtime pay, bonuses, investment income, royalties, or rental-property income. If you have income from a part-time activity such as playing in a band or selling stuff on eBay, add it to the pile!
After you list all your income sources, come up with an average monthly income. Why monthly? Because you pay most of your major expenses on a monthly basis — mortgage or rent, utilities, phone, and even many charitable contributions are often portioned out in monthly increments.
