Chapter 1

Managing Your Money

IN THIS CHAPTER

Tracking your expenses

Calculating your income

Exploring your financial goals

Putting together a budget

A budget is the first step to living within your means and, even more important, living the life you choose. Knowing your expenses, your income, and your financial goals is the foundation. In this chapter, you grab a notebook - or create an easy spreadsheet on your computer - to find out just where you stand financially so that you can move forward with financial awareness and stability.

Start by taking a look at expenses. How much do you spend each month? What are fixed expenses - those bills you pay regularly? What about variable expenses - those that fluctuate? Think about the difference between basic necessities and luxuries - needs versus wants.

The next step is looking at income. How much do you earn? Do you have investments? Other streams of income? Do you have retirement income?

The final step is setting your sights on the future. What are your financial goals? Going out to dinner more often? Fixing the roof? Visiting family more often or going on that dream vacation?

These are the types of questions you look at in this chapter. And, with the answers to these questions, you can begin to create a budget. When you become financially aware, your life can change in ways small and big. You can make room for things that matter so you're living life on your terms.

Seeing Where Your Money Goes: Your Expenses

Tracking your expenses for a month or longer can show you exactly where your money is going. Write down what you spend in cash, by check, and through payment services such as CashApp, PayPal, and Venmo. Review your debit and credit card expenditures. Then look at periodic - including quarterly and annual - expenditures such as taxes, homeowners or renters insurance, and vacations. You'll most likely discover spending patterns, some of which may surprise you. Perhaps you realize you're spending way too much in a category, like takeout meals or multiple streaming services. Or maybe you find that your medications are depleting your income, and you want to look at discount cards or different insurance options.

Identifying fixed expenses

Fixed expenses are approximately the same amount of money every billing period, such as your rent or mortgage and car payments. Fixed expenses are paid weekly, monthly, quarterly, or annually. For example, you may pay for your car registration every year or two and your car insurance monthly or quarterly. Weekly fixed expenses may include things like a parking or commuter pass. Figure 1-1 shows various examples of fixed expenses.

Allowing for variable expenses

Variable expenses, or variable costs, unlike fixed expenses, vary from month to month and may be items you regularly purchase or ones you buy only occasionally (see Figure 1-2). Common variable expenses include areas like the following:

• Groceries
• Gas for your car
• Food for your pets
• Items for any hobbies
• Personal care items like hygiene products or makeup

© John Wiley & Sons, Inc.

FIGURE 1-1: Spending categories that are considered fixed expenses.

Variable expenses can be more challenging for you to track. Depending on the time of year or stage of your life, your spending in these categories can fluctuate. You may spend nearly nothing in a category like household items one month and then easily spend a few hundred dollars there the next month. You may spend a lot more money during the holiday season between vacations and gifts.

Once you've tracked variable expenses for a few months, you'll have an easier time assigning a monetary value to them. A category may occasionally spike, initially throwing everything you had planned off course. You're going to figure this all out.

© John Wiley & Sons, Inc.

FIGURE 1-2: Spending categories that are variable expenses.

Calculating your total spending

After you know your fixed and variable expenses, you're ready to evaluate what you spend every month. Grab your notebook or open up your spreadsheet and follow these steps:

1. Make a list of your fixed expenses.

   In addition to your housing expenses, list car payments and fun things like gym memberships, subscription boxes, and streaming services. Divide these into categories. For instance, under housing you'd put mortgage or rent, homeowners or renters insurance, and utilities.

2. Make a list of your variable expenses.

   Just as you did for fixed expenses, put your variable expenses in categories.

3. Add up the total monthly costs for fixed expenses each month.

   You now clearly see how much you spend every month on your fixed expenses. Once you've done this for a few months, compare your fixed expenses month over month.

4. Add up the total annual costs for variable expenses.

   Because these are periodic, not monthly, you'll need to gather your expenses over time to see your annual costs. To get a monthly estimate, divide by 12.

5. Evaluate whether you need those expenses.

   Consider whether all your expenses are necessary. Do you need to spend money on a gym membership every month, or can you find a cheaper way to work out, such as walking on local trails? If you've signed up to get monthly items or deliveries, do you have the option to pause them and work through your current supply instead?

   Assess your larger expenses, too - not just the minor ones. For example: You realize rent may be costing you more of your take-home pay than you're comfortable with. Moving can be expensive, but make a note to research other living arrangements when you get closer to the end of your lease.

Understanding needs versus wants

Fixed and variable expenses can include both needs and wants:

• Generally speaking, needs include categories such as rent or mortgage payments, food, gas to get to and from work if you commute, and healthcare, including medicine.
• Wants are things like eating out, getting a new cellphone when your current one works fine, and going to concerts and movies.

Consider ways to save on both needs and wants. For instance, on needs, look for weekly specials at the grocery store. For wants, get on listservs for discounts on entertainment.

The difference between needs and wants can get murky quickly, especially because one person's want may genuinely be another person's need. Spending money on your wants is perfectly okay; you just need to figure out how to budget for them.

Be realistic when determining your wants and needs. Suppose you have a specific life situation that requires you to spend a bit more on your variable expenses. If so, budget for it. Perhaps you have a busy, stressful job. Maybe getting a massage once a month and ordering takeout a few times a week makes your own and your family's life manageable. Perhaps you pay more in a specific category, like eating out, than people say you should. But being realistic about your spending will help keep you on budget.

Knowing Where Your Money Comes From: Your Income

Your income is an essential component of your budget. Knowing how much money you have coming in helps you make sure your expenses don't exceed your income. It can also help you set realistic goals for all areas that relate to your finances and perhaps even quality of life. When tracking your income, you may realize you have more than you initially thought you had. On the other hand, when you look at your income and expenses, you may find you have a spending deficit, which means you need to find ways to either cut back or earn more.

When discussing your work income, one dollar amount you need to keep in mind is your net pay. Net pay is the amount of money left after any withholdings you may be subjected to, such as federal and state taxes, FICA taxes (supporting Social Security and Medicare), health insurance, and any wage garnishments you may be paying off. Your net pay is the money you have to pay your fixed and variable expenses and put toward savings and your goals.

Your income may also include earnings from your investments and other sources such as retirement income.

The most important type of income you should consider is what you earn monthly to cover all your expenses. Monthly income can come from various sources. While it can be consistent, it can also be different from month to month. Here's a list of different types of monthly income you can earn:

• Income from full-time and/or part-time employment: This is income you receive from an employer that has you on its payroll. Some jobs pay a salary - a flat amount of money per paycheck - and others pay an hourly wage. Unlike a salary, hourly income can fluctuate because the number of hours you work may vary.
• Income as a self-employed freelancer or consultant: Freelancers and contractors are considered self-employed, but the main difference is that freelancers generally balance more than one client and work...