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Calculating Family Income
Mary and John felt good about the progress they had already made in gaining control over their family finances. They knew where they were spending their money. Now if they could figure out what their income would be, they could begin to make some comparisons.
"Mary, I've got my paystubs here. This one covers the first six months and tells what the totals are so far this year." John had brought the file they used for all sources of income for the Smith family. In the file were the stubs from John's paychecks, stubs from Mary's commission checks, and statements from their savings and investment accounts. "Where do you think we should start?"
Mary had already done some reading on how to approach the subject. "Let's start by trying to estimate what our yearly income will be. What's the total of your salary for the first six months of this year?"
John took the paystub that covered the June 30th period. "Do you want the gross or the net number?" It was a very good question. The gross income included the deductions that went to pay taxes, insurance and John's 401k retirement plan. If they used gross income, John and Mary would need to include all the deductions when they figured their expenses. This can be a little bit tricky since you don't write a check or pay cash for these expenses.
The other option is to just use your net or spendable income. When you do your budget this way you only consider the money you have to spend after deductions are taken from your pay. Your budgeted expenses only include those things that you'll pay by check or cash.
Mary felt that she had a more complete picture of their income and expenses by using the gross method which included everything. She went back to her calculations on expenses to make sure that she had included the items that were deducted from their paychecks. Mary had included those expenses. But if she hadn't, it would have been relatively easy to make the adjustments now.
John and Mary began to assemble their annual income estimate. They took John's total salary for the first six months of the year and doubled it to arrive at the annual amount.
"John, do you still expect to get a raise this fall?" John said that he expected about a 5% raise around October 1st. They adjusted his salary estimate by 5% for 3 months and added that to the total.
They reviewed Mary's commission checks. At first they doubled Mary's six month income. But her business was more active in the last part of the year. In fact she often made as much in the last 3 months as she did in the first six. They looked at past years and estimated what the total for this year would be.
"What about the interest from our checking and money market accounts? Do you think we should include that?" John thought about Mary's question for a moment. "Well, we don't really plan on spending the interest from our money market, but the interest in our checking account sure seems to disappear!"
They decided that income from investments that was reinvested would not be included in their income figure. That meant that income from their money market fund and mutual funds wouldn't be part of their income number.
Income from their checking account tended to be spent. So they included that interest when they figured their income for the year. Since the amount in their checking account didn't vary much from month to month, they just took one month's interest and multiplied by twelve to get the annual amount.
Mary and John didn't expect any major changes in the coming months so their work was nearly completed. If they were expecting a leave of absence (like a maternity leave) or some other major change in their circumstance, they would have needed to include adjustments for those changes.
Their work was quickly finished. In a short time Mary and John knew how much money the Smith family had available to them each year. Now came the moment of truth.
Mary took out the file that she had used when calculating their annual expenses. She compared the expenses to the income. "John, we've got a little problem here. Take a look at these numbers."
John took the expense numbers from Mary and looked at the total expected expenses. When he compared that number to their income he understood his wife's concern. If everything happened according to the plan that they had assembled they would be spending nearly $3,000 more than they made.
"Well, sweetheart, it could be worse. It could be $13,000!" Mary wasn't calmed by John's attempt at humor. "I guess it's better that we know it now while there's still something we can do about it," she replied.
It was quiet in the Smith house for a moment as both John and Mary mentally absorbed the information that they had just reviewed. Each knew that accumulating debt wasn't a good idea, but they were unsure of how to bring their budget into balance.
Mary was the first to break the silence. "Guess we need to review our expenses to see where we can save the money. Got any bright ideas?"
"Don't worry honey. There's got to be a way. We've figured everything else out. No reason to believe that we can't solve this problem." So John and Mary began to consider different strategies for matching their income and expenses. The next time we visit them we'll see how they solved their problem. (to be continued...)
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
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