Taking the time to understand my personal finances was one of the first steps I took to pay off my debt. I mean I knew I was broke and in debt but… I didn’t REALLY know. My net income was barely two digits every month before I got my money right.
I was broke because I worked underpaying jobs, yes, but also because my spending habits were terrible. I had way more money going out every month than I had coming in. Thanks for reading that crash course in How To Stay in Debt 101.
To get started on your debt-free journey, get familiar with these four words:
1. Gross Income
Your gross income is all the money you bring in at one period of time (before any expenses and taxes). If you have multiple jobs, you would take your paychecks from each job and add them up to get your gross income.
For example, if you make $2000 a month from your 9-5 and $300 a month from your part-time job a month. Your gross income is $2300 a month.
TIP: If you are figuring out your gross income to create a debt-free budget plan, use your income total amount after taxes. It will provide a clearer understanding of how much money you are working with on a monthly basis and allow you to better map out your budget.
2. Expense
Your expenses are recurring payments. This is money that comes out of your gross income to pay for things that make up your broader life. Expenses range from basic life necessities to entertainment, business and investments.
Expenses may or may not be fixed amounts. For instance, a Spotify or Amazon Prime subscription is a fixed amount; you know how much money that will take out of your gross income every month. Fluctuating expense amounts could be things like your phone and cable bill or a night out.
TIP: Your car loan, credit cards, student loans, etc. are not regular expenses (see next term)
3. Liability
Your liabilities are expenses however they are recurring payments that can most definitely eventually be paid off. Your liabilities are the things that keep you in debt. These along with your spending habits are the root of your financial problems.
Liabilities are things like car and student loans, credit card balances, and other big purchases. To be financially free, you have to get out of debt and to do that you have to get rid of your liabilities.
TIP: The wealthy have assets not liabilities.
4. Net Income
Your net income is the This is the amount of money you have left over after your expenses and liabilities. To calculate your net income, subtract your your expenses and liabilities from your gross income. Use a tool like the Get Your Money Right Workbook to help makes this process quick and simple (no calculator needed).
Some financially positive things to do with this left over money would be to donate, put it towards your debt, invest, or start a business. You can use this money to spend however you want.
TIP: It is possible for your net income to be negative. That means you spend more money than you bring in at any given time.
===
Learn anything new words ?? Let me know in the comments.