Creating a budget, part 2- tracking income and aiming for balance

Note: the following is primarily aimed for Canadian residents. Terms like CPP and EI are payroll deductions for Canada.  

It turns out tracking income is not always easy. “Income” is defined as salary, commissions and various types of payments. It is tangible. A future bonus or commission is not an income, as long as it is not actually deposited in your bank account.

There are usually 2 types of income: income from employment or self-employment, government benefits, and other types of income such as dividends, alimony, tax refund, reimbursement etc…I personally never use the latter category to budget. I would suggest that you don’t either. For most people, this type of income is irregular and not guaranteed.

If you are on a salary, take your latest pay-stub and look at the net amount. Multiply by two, and this is your net income for the month. Always use net amounts when budgeting.

If you are on an hourly basis or on commissions, look at your tax return. Take your income on the first line. Deduce the CPP, EI and income tax amounts from that number. It gives your net yearly income. Divide by 12. You have your average monthly income. I know, it is a bit of work, but it will make your life easier in the long run!

If you are self-employed, you will have to go through your personal bank statements and your company’s to track all the transfers that were made within the last 12 months. You can also look at your tax return. Again, don’t forget to deduce the income tax and CPP amounts. Once you have the net amount, divide it by 12 to have your average monthly income.

Enter any other income such as dividends, tax refund etc…on a separate line. I use these as a budget booster when I happen to receive them.

Once you have done this, you can now compare your income vs. your expenses. Usually, there will either be a surplus or a deficit. The goal is to aim for “zero”, i.e. a balanced budget.

If you have a surplus, good for you! You can allocate it either to additional debt repayment or savings, or both.

If you have a deficit, time to take a hard look at both your expenses and income. Usually, trimming your expenses is enough to get back to black. How much do you spend on take-out and restaurants? How many TV channels do you need? Do you smoke? What about your cell phone bill? Have you reviewed your various insurances?

If you are still in the red, review your job situation. If you are self-employed, take a part-time job on the side for additional funds. If you work part-time, move to full-time. If you are already working full-time, either find a better paying job or take a second job. Taking a second job is not always the right choice though.

If after doing all of the above, you still cannot balance your budget, it might be time to see a Trustee in bankruptcy. Unfortunately, at times, a consumer proposal or bankruptcy is the only option.

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