Updated: May 7, 2021
Now that you have set your goals and figured out your current net worth, you’re ready and waiting at the starting line of this race. Let’s start moving forward to figure out how to get to your ‘Off Ramp’ with Step 3: Dive Into Your Income & Spending.
As the title of this step says, this step will dive into all of your sources of income and everything you spend money on (your expenses). This emphasizes a pivotal quote that I highlighted in the overview of the 6 Steps of the ‘Rat Race Off Ramp’: The key to building wealth is spending less money than you earn and saving the difference.
Many of you reading this know about what your income is every month, but at the same time, many, or potentially most, of you may not know how much you spend every month. To start, let’s take the easy topic first – income – and then cover spending.
Income
Income is pretty straight forward. For many jobs and careers, the associated income (pay) is fairly regular or consistent, usually every two weeks or twice per month. If you’re in the service industry and regularly earn tips, your income may be more erratic depending on the season or the days of the week you are working. You have gross income (before taxes) and net income (after taxes). When it comes to your finances, it is easier and more conservative to use your net income for planning. Also, for income and savings calculations, use any retirement contributions you make as income.
Spending
Where do you spend your money? Does it seem to disappear way faster than it appeared? When it comes to knowing what you spend, I’m NOT talking about budgeting down to every penny you spend and earn. Most of you probably don’t have a budget, and that is okay. What I’m talking about is knowing about how much and what you expect to spend your money on each month. Don’t confuse knowing how much you spend with having a budget. I think they are different, actually very different.
For our family, I don’t use a budget in the traditional sense, but I do know what our income is every month and the average of what we spend every month, which I use to set up our annual goals for saving. We have our fixed expenses, which don’t change much month to month, and an average amount for variable expenses that mostly go on a credit card (and gets paid off in FULL every month). That is our baseline spending for each month. I also track our spending every month, while specifically breaking out spending on groceries, gas, eating out, and home maintenance/repair. I have a plan for our expected expenses, and I track our spending in a spreadsheet. There are quite a few tools out there to track spending, so don’t feel obligated to use a spreadsheet. Here is a link to a Google search for “top spending tracker app.”
However, I did build an Income & Expense Planner with Excel. Here is a screen shot of an example I put together. If you’d like the Income & Expense Planner file, please send me a comment through the Contact Us page asking for the Income & Expense Planner. You can also sign-up for the weekly ‘Off Ramp’ email and select the box next to ‘Income & Expense Planner’. If you are already on the weekly email list, you’ll get the most recent ‘Income & Expense Planner’ on Saturday with the weekly email. Click on the spreadsheet for a clearer image.
Okay, Now What?
Get your income and expenses together and see how much you are spending each month compared to your income. Is your income higher than your spending? Is your spending higher than your income? Can you make adjustments? Where? This is where you start making changes to your current spending habits to pay down debt and increase your savings. If you’re serious about trying to get ahead financially, I highly recommend tracking your spending for at least a few months. If you have never tracked your spending before, you will likely find a few unpleasant surprises about how much you are spending in certain areas. Tracking your spending will also help you figure out where you can cut back on expenses to reach your goals. Below are a bunch of posts I’ve already written about spending and cutting expenses. Take a look to see what you can do to start moving towards your ‘Off Ramp’.
Thinking About Your Spending
Money and Your Life: What does money mean to you? Your spouse? Family? These are important questions to ask, and even more importantly, they are important questions to answer with your loved ones, especially your spouse. READ MORE…
What’s Your Why? There are many reasons why we all spend our money how we do, but what drives our spending? Does your spending reflect what you want your life to look like now and in the future? Or do you get pressured by your environment and feel like you need to ‘keep up with the Joneses’? Do you get swayed by marketing and advertising to buy things you don’t really need? It is time for you to figure out your ‘why’ with money. READ MORE…
What is Your Latte Factor? A cup of coffee here. Take out there. A new pair of shoes. A new pair of jeans. Another streaming service. We all buy things and many of us don’t realize just how much money these ‘little’ things add up to. All these ‘little’ purchases can actually become big costs and an even bigger hindrance to saving money. READ MORE…
Spending With A Different Mindset: Everyone deals with money, all the time: earning it, saving it, spending it, investing it and borrowing it. How do you manage your finances? How should you manage your finances? No two individuals or families will have the exact same goals, but the path to get to those goals will be similar for many. READ MORE…
Are You a Victim of the Diderot Effect? We know it better as “keeping up with the Joneses” or “lifestyle creep,” but an 18th Century philosopher lived it and wrote about it. French philosopher and writer, Denis Diderot, live most of his life as a poor man barely scraping by, until he came into significant wealth, for him, when he sold his book collection to Catherine the Great of Russia. READ MORE…
What Are Your Expenses?
Where Your Money Goes… What do you spend your money on? For the most part, expenses are divided into two categories: fixed expenses and variable expenses. READ MORE…
Cutting Your Expenses
9 Ways to Cut Fixed Expenses: Did you know you can save money on your fixed expenses? Maybe you are thinking that doesn’t make any sense. They are FIXED expenses. Yes, they are fixed expenses, as in monthly recurring expenses, but how much they cost can be changed by making adjustments to them in various ways. READ MORE…
Let’s Talk Grocery Shopping….No I’m Not Kidding: We all have to eat, so how do we save on food? Don’t worry, I’m not going to suggest Ramen every night. Although that would save you a lot of money, it would probably be pretty terrible for your overall health. READ MORE…
5 Ways to Save When Eating At Restaurants: Even if you like to cook, it is nice to be able to go to a restaurant, order food, eat, not have to clean the dishes, and to try out some new restaurants and food. But there are trade-offs. A lot of meals in restaurants have larger portions and are higher calorie meals than what we would normally eat at home, and eating out is almost always more expensive than preparing your own meals at home. READ MORE…
Are These 2 Expenses Emptying Your Pockets? We all spend on unnecessary things, but the difference is how much we spend and how useful the products we buy are for us. Today, we are going to cover two areas of spending that can be vastly different for every person reading this. READ MORE…
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