Where the Money Comes From and Where it Goes

So much for the general principles which should guide your day-to-day money management. Now let’s get down to cases. Exactly what do you do when you manage money? You do just this: you keep track of what comes in and what goes out, and you make sure of three things about the outgo:

• That it isn’t more than your income.
• That it is providing for your future as well as for the present.
• That it is buying the things your family needs and wants MOST.

First, let’s look at what comes in. For most people, that is primarily a regular wage or salary. You can estimate that pretty accurately for the year. One reminder: In estimating your year’s earnings for budgeting purposes, figure the take-home pay only. Anything regularly deducted from your paycheck (for income taxes, social security, medical insurance, union dues, etc.) is “money already allocated.”

In addition to the regular earnings, there are, in many families, other sources of income which should be kept in mind when you are counting on the total amount of money you will have available during the year. These include interest in a savings account, money market accounts, dividends from an investment, year-end bonus (if you’re sure you can count on it), average overtime income (based on previous years), and even odd-jobs earnings by others in the family. Total all of these, counting only sure things, not money that might come in or that you hope will come in. You now have the raw material for money management – that is, income.

How Will You Manage The Money?

As you allocate your money to meet expenses, recognize that some of these expenses are fixed and some are flexible. The fixed expenses must have first call on your income. These fixed expenses include taxes (some of which may already have been paid by money withheld from your paycheck), insurance premiums, mortgage payment, and regular payments which are due on credit cards, car payments, installment purchases or personal debts.

Once you have provided for your “must-pay” expenses you are ready to tackle the nuts-and-bolts of money management – that is, meeting your day-to-day expenses. These include:

Food – everything spent on what you consume at home – including what you drink; also includes lunches packed for work and school.

Shelter – if you’re buying a home, mortgage payments are not included, since they are fixed expenses; rent is included, as are utilities, cable, cell phone, repairs, home insurance, cleaning supplies.

Furnishing and equipment – furniture and appliances, unless you are buying them through installment credit, in which case they become fixed expenses; also includes dishes, drapes, rugs, accessories, repairs to appliances.

Clothing – all wearing apparel, plus upkeep, such as dry cleaning, laundry, etc.

Transportation – payments on a car come under fixed expenses; include here gas, oil, and repairs, plus bus fare, parking, etc.

Medical care – unless paid for by insurance, include payments to doctors, dentists, nurses, hospitals, plus costs of medicine.

Recreation – meals in restaurants, travel and lodging for vacations, movies, concerts, books, membership fees in social or athletic clubs, hobby equipment.

Personal Allowance – cosmetics, beauty and hair care, odds and ends, and money for school lunches and bus tokens when this is included in an allowance.

Gifts and Contributions – including church contributions, contributions to charity unless deducted from paycheck.

Education – if child is in private school; also include adult education fees, music and dancing lessons, tutoring.

Another important expense you should meet regularly is an allocation for savings. The amount you save will be flexible from year to year, but once you have agreed that you will save a certain amount out of each paycheck, consider this a firm commitment – consider it a monthly bill! Your savings might be in the form of building a “rainy day” fund, or you might be saving for something specific, such as a vacation, or next year’s Christmas spending.

Many families have a struggle with savings as a part of budgeting because they’re perfectly willing to start this admirable habit – but tomorrow. After the expenses of the party they’re giving on Saturday night, after the little vacation trip they’ve planned, after they buy a new coat – then they’ll really get cracking on that habit of regular savings. That’s a trap into which a good money-manager will not fall. Savings is not an afterthought. It happens now… and again next week… and again the week after.

The above listing of day-to-day expenses merely suggests broad classifications which may be useful to you. Feel free to draw up another set of classifications which might be more realistic in your case. Use any type of record-keeping that suits you. Keep books, fill out forms, move funds in and out of different bank accounts, move cash in and out of separately-labeled envelopes – or make up your own method. But this is important: spend no more for daily living than what is left-over from income after all fixed expenses have been provided for… and some savings have been set aside.

This may come as quite a jolt to you, because at a glance that list of day-to-day expenses seems to call for quite a bit of money. But remember that this is the flexible part of your budget. You do have some choice over your fixed expenses, it is true. You decide for yourself what things will be bought on installment, and by doing so, you establish the size of your indebtedness.

You decide how much insurance you will carry. But once these decisions have been made, your commitments to pay are fixed. As for your daily expenses, these are short-range decisions. If you must, you can cut down in many ways – give up your plan for a new set of dishes, give up David’ music lessons, buy less expensive cuts of meat, remodel a room you remodeled 2 years ago or cut down on the cable extras.

Giving things up is always hard on the morale. Much better to decide at the beginning of each year, after reviewing the economic facts of your life, that you will spend no more than so much for food, so much for shelter, etc. Then make plans that fit into these limits; don’t overshoot and you won’t have to cut back.