Romance. The idea alone tends to conjure up images of the modern “date night”. Spending cash to spend time together...
We are working hard to provide you with the latest, most comprehensive information about bankruptcy. This section is coming soon! Please check back with us in the near future! To get help now, please click the button below.
Know what you earn: Calculating your income
The first step in understanding your finances better is to fully understand how much money you and your family are bringing in each month. If you are employed, you already know that the wage you were hired at is not the same figure you take home each month. This is because your gross pay (your hourly or salaried wages) is paid out before deductions, like taxes, are accounted for. What you actually take home is called your net pay, which represents your gross income minus taxes and other items like deductions and credits.
There are all sorts of income types. Here’s a list of the most common ones:
Employment Income (wages, salaries, and tips)
These are your employment earnings, which is the amount you make at your job. It’s important to know the exact net amount you and your family bring in monthly from this income type. Some people have additional deductions they have to figure in when determining their exact take home amount. These include items like insurance deductions and 401 (k) contributions. Be sure to fully review paycheck stubs to ensure you are calculating your take home income accurately.
Other wages include those earned from self-employed individuals. A popular type of self-employment is the independent contractor. This would essentially cover the income of people that are working on a contracted basis, not as a traditional employee. The IRS has some information regarding defining this role here. This income is still taxed is differently than an employee. Companies do not pay any payroll tax or withhold any tax liability for the payee when paying subcontractors that are self-employed. If you are working in this capacity, it’s important to remember that you will be responsible for both the income taxes and the self-employment taxes on your income. Taxes for self-employed individuals are generally paid quarterly. In order to determine what your net income will end up being, you’ll need to determine your tax rate and deduct the amount you’ll need to pay the IRS from the income you receive. You can learn more about this here. Other forms of Self-Employment income include Sole Proprietorship. This is essentially the same as an Independent Contractor, but is considered a type of business for income tax purposes (where an independent contractor is considered the opposite of an employee for payroll tax purposes). On a more complicated scale tax-wise, there’s also income generated from owning part of or an entire business. It’s generally a good idea to enlist the help of a Certified Public Accountant in these more complex income situations. The businesses help page on the IRS website (https://www.irs.gov/businesses) is a good place to learn more. There you will find an entire tax center dedicated to self-employed individuals.
Social Security is Federal program designed to offer social insurance and benefits to American workers and the disabled. There are essentially two main types of Social Security benefits: Retirement and Disability. People who paid into Social Security when they worked receive Social Security income when they retire. The amount they receive is based on the average wages they earned over the lifetime of their work. There are some age restrictions around the retirement benefit, which can be viewed here. Death and Survivorship benefits extend to the spouses of deceased retirees. Spouses are eligible to receive Social Security benefits even if they have very little or no work history. In some situations, divorced spouses and even children may qualify to receive benefits. These all fall under the retirement benefit, but become a little more complex. AARP created a great Q & A page that breaks down these types down, which you can view here.
There are essentially two types of disability social security benefits, which are SSDI (Social Security Disability Income) and SSI (Supplemental Security Income). Social Security defines disability thoroughly here. They also offer a screening tool, which you can access here, that will helps people find out which programs may be able to pay them benefits.
SSDI is available to people who have collected the necessary number of work credits throughout their work history. This program is funded through payroll taxes. The number of years worked and contributions made by the worker qualifies them to be “insured” by this program. Spouses and children are eligible to receive “auxiliary benefits”, which is a partial dependent payment. Social Security only pays for total disability, not partial or short term, and there is a five month wait from the time you apply (SSA won’t pay benefits for the first five months after an individual becomes disabled). There are both medical and non-medical requirements. Many applicants report that the process of applying is stringent, lengthy, and often times takes at least one level of appeal (meaning many first time applications get denied). There are attorney’s that specialize in Social Security law that help individuals with these cases, especially appealing after a denial. They typically earn their fee through contingency, which means they are paid a percentage of the individual’s earnings (often back pay). Once approved, the amount of the monthly benefit works similarly to the retirement benefit, as it depends on the person’s earning record. Another federal insurance program, Medicare, becomes available to two years.
Unlike SSDI, Supplemental Security Income, or SSI, is not paid form the Social Security trust fund and is not dependent on work history. This program is based on solely on the individual’s needs and is only available to people with a very limited income, assets, and resources. These benefits are available to both disabled children and adults that meet the criteria. People who are eligible for this benefit can also receive Medicaid insurance, and most will also qualify for other relief programs such as food stamps. The SSA offers more information here.
Some people earn money from other sources, such as rental properties, unemployment compensation, lottery winnings, and gifts. These should all be considered as part of your total income when reviewing your total earnings.
Know what you spend: Calculating your expenses
Now that you understand how much money you have coming in each month, it’s time to take a closer look at what is going out. Tracking all of your expenses is the next step you’ll need to take towards creating your budget. Many people think they know how much they spend each month, but are surprised by the actual figure they arrive at after writing it all down. You may know the exact number of your fixed monthly bills, but neglect to factor in purchases such as food and fuel. If you find that more cash is going out than you have coming in, this is a crucial step in gaining control over your spending.
We’ve simplified the process for you below. To find out what you are really spending each month, follow these steps:
- Grab your bank and credit card statements Having the last few months’ financial statements on hand during this process is helpful. Include the statements from all of the accounts you spend money from. You’ll be able to see exactly where your money is going by identifying regular spending habits. This will shine a light on your actual spending. Many people think they are spending one amount on monthly on groceries, for instance, but after reviewing their bank statement, they see many more transactions at their local grocery store than they expected. This exercise alone can be extremely beneficial in getting a handle on spending.
Feeling overwhelmed? Help is available for many common financial problems!
Childcare costs are one of the largest expenses a family with children will face. This is especially true for single...
Articles on Credit and Debt, Personal Finance, and Education are coming soon! Check back frequently.
According to The Department of Labor, the average American spends 12.4% of their income on food. Up to 47% of...