With the start of the new year around the corner, it’s a good time to review the money coming in and the money going out.  Don’t worry, you don’t need your algebra calculator for this one, it’s pretty straightforward. Also, this may feel a lot like a budget, but I’d argue it’s an income statement first and then you can adjust from what you’re targeting to do in order to call it a budget.  It also sounds like some very detailed work and most people won’t take the time to put this kind of info together.  However, there is an easier way to back into it because there are only five ways to use money: Live, Give, Owe (taxes and debts), and Grow. If you have 20 minutes, you can do this on your own! I’ll address these a bit out of order from that listed but it will make sense at the end.

Give

How much money do you give away each year?  Do you tithe to your church or support a 501(c)3 organization?  Perhaps you help support a family member with a certain amount each month?  Add up all these amounts to determine an annual amount.

Owe Debt

People know their monthly debt payments. So list those out and multiple by 12 to get your total debt payments.

Owe Taxes

Grab last year’s tax return and find the total amount of taxes paid.  Do this for federal and state taxes.  You can also grab a copy of your W2 to find the total amount of social security and medicare taxes paid.  It would be appropriate to add in your property taxes to this group as well (note: if you escrow your property taxes and insurance with your mortgage payment, you’ll need to adjust your debts above.  Your mortgage statement should have this info to break out). Total up all of these taxes.

Grow

Here, you’ll want to add up all of your contributions to a savings account.  If you put money in your retirement account each month, add that and multiply by 12 (do not include any employer contributions such as match or profit sharing).  Same with any regular savings amount such as into a bank savings account or 529 college savings plan.

Live

Now, this is what you’re spending.  But it’s the hardest to define quickly because of the multitude of items involved, so we back into this number.  Take your total annual income before taxes and subtract the totals of giving, taxes owed, debts owed, and grow you listed above.  Take what’s left and divide by 12.  This gives you an approximate of your monthly spending. 

I prefer to look at all these as a percentage when it’s finished.  To do that, divide each total by the total annual income to see the percentage of your total income that each category takes.

I like this approach because it tells you where you currently stand in a matter of minutes.  You may like it or you may not, but this gives you insight into where you may want to dig deeper for some changes.  You have to know where you are currently before you can decide where to go next.  If you’d like more help in digging into this, feel free to schedule some time for us to meet!