Managing your money successfully relies on figuring out your income and expenses. This boils down to how much money you have coming in, and how you’re spending the money you have. Using those two factors, you can compare your resources with the amount of money you spend on a monthly basis and plan what you expect to spend in the future. It also allows you, if necessary, to determine where you can cut costs so you can save, invest, or get out of debt.
In most cases, income comes from salary or wages, government benefits, such as Social Security, and investment income. You may also have savings to draw on, or gifts from family members. But income can be variable, which is one of the reasons that budgets are not set in stone. Earnings in particular frequently change: Most people expect that earnings will increase over time the longer they are in the working world, gaining more experience and earning power.
Just as fast as income arrives, money goes back out to pay for a seemingly endless list of expenditures, including housing, utilities, phone and internet, transportation—and that’s just basic monthly expenses. There’s also insurance, healthcare and child care, credit card bills, groceries, and clothing, among countless other things that chip away at income.
In addition to the funds going out to pay bills, expenses that should be built into a spending plan are set amounts – ideally figured as a percentage of your income—to build a savings account, grow an investment portfolio, and plan for retirement.