There’s two pieces to personal finance success: what you bring in and what you spend.
The most important (and extremely simple) equation for personal finance success is what you bring in – what you spend. If that number is positive, your net worth is growing. If it isn’t, you’re going in the wrong direction.
On Day 5 (below), it’s time to figure out the first part of that equation — how much you’re bringing in.
As you’ve learned from looking at your net worth, there are two sides to your financial picture: how much you bring in and how much you spend.
Is it easier to have a higher net worth with a fat-cat salary? Absolutely. But you don’t need to make a lot of money to save a lot of money. In fact, cutting your spending is almost always easier to do than waiting for your next salary increase at work.
For our purposes, your salary is the amount of money you have to use – and you’ll use every penny of it.
Your Money is Going Somewhere
Too often, people will get their paycheck every 2 weeks, pay their bills, maybe move a little bit to their savings, and then move on.
The problem? This leaves your money sitting around, most likely in a low-yield checking account.
Budgeting experts will tell you to have every penny accounted for before the month starts. If you make $4165.72 per month, you will use $4165.72 that month; whether it’s either going to pay a bill, invest for the future, save for the short-term, or go toward a debt.
In order to automate your finances fully, you need to know exactly how much money you’ll be bringing in each month.
How to Calculate Your Monthly Income
Since the Automated Finances system works on a monthly basis, you need to calculate your total monthly intake. Your intake is the money you make after taxes, insurance and any other pre-tax deductions.
Generally, add up your income from the past 12 months and divide by 12. If you have a few months that are out of the normal range (say you’re a tax consultant or work as Santa Claus during Christmas-time), drop those from the equation and divide by the leftover months.
If you’re married or share your finances with someone else, add their expected monthly income to your total.
Got It; Now What?
Now that you have your expected monthly income, you know what you have to work with.
Every penny of that number will be doing something each month, and much of it will be done on its own.
TIP: Don’t forget to add in other regular sources of income into your expected monthly total. This could be from side jobs or passive income you have. If it’s irregular, use the freelancer method to determine an expected total.
About the author: Jason is the author of Automatic Finances: 17 Days to Your Financial Freedom, a guide to automated money management. He started investing thanks to a free lunch, and after finding out how he was getting the short end of the stick, he sought out how to do it right. More »