What should we do with money?
In the crush of daily living, sometimes it is not obvious how to make a plan to live well. We scramble to earn a living, to commute to the salt mines, to pay the bills, and keep the family together.
So let’s look at money in more depth. Find some paper and a pen.
So how to do money?
There are two parts.
The first part is looking at what is coming in. This means to look at one’s income. How much money am I earning?
The second part is what is going out. This means looking at one’s expenses. How much am I spending?
Income
First look at one’s “gross income.” This is the amount that you see on paper before taxes and other deductions. Sometimes this is called the “before tax income.”
Then look at all expenses and deductions from your paycheck.
What is left is one’s “net income.” Sometimes this is called the “after tax income.”
Note all three numbers on paper.
Arrange these so you have a monthly number. So if you get paid every week, you can take the net and multiple by four to get an approximate monthly number. If you get paid every two weeks, double it to get the approximate monthly amount. Don’t forget this is a rough estimate.
Outgo
On paper, list all other expenses that you can.
If you pay rent or pay a mortgage, note it.
Write down all other expenses. Some are fairly easy to see, like some monthly utility bills. Some may vary some from month to month, so all you need at this point is an average, an estimate.
Food and related items. Not always easy to know an exact amount, so write down your best guess.
Then there are occasional but expected expenses. These are things like repairs, medical and dental bills, and so on. Do you have other bills? Are you paying off debt? Do you have insurance bills? Write them all down.
Write it all down. Add them up. Determine what the monthly amount is.
And Now
So now you have a rough idea of your financial condition. Do not be afraid, all will be in good shape in good time.
Compare your total monthly expenses with your monthly gross income. How does it compare?
Let’s Compare
If the total of your expenses are greater than your net income, you will need to make some adjustments if you want to get your financial life in better shape.
If the total of your expenses are less than your net income, then you are already on the right track.
Where To Go
First let’s look at the first goal. The first goal is to spend less that one earns. If this is the case already, your first goal changes to keep it that way.
If one’s expenses are greater than one’s income, then the goal is to change that situation. Spend less than one earns is the main goal.
How to Change
If one’s expenses are greater than one’s income, what to do? Change.
Change is easy to talk about but hard to do. On the other hand, there are several things to keep in mind.
One does not need to change everything all at once. One thing at a time makes it easier.
So, what expenses can be reduced or eliminated? That can be hard and scary. But I promise you, you will be much happier later that you started taking these steps. Later you will look back and know that these initial changes made all the difference in the world on getting things better.
Debt?
If you have debt, then let’s look at it all.
Credit card and other consumer debt is the most expensive, so working on paying that off is where to go first, along with saving in an emergency fund. More about this shortly.
Managing Money
This is the part where we look at what to do with the money we have.
Phase I
1 & 2. Pay down debt
2 & 1. Save in an Emergency Fund.
Phase II
Combination of the following:
– Contribute to 401k/IRA
– Save in high-interest money market account
Phase III
– Invest to grow wealth.
The three phases can overlap to some degree.
Overlap? What Do You Mean?
Let’s look at Phase I. Paying down debt and saving in an emergency fund are both top priorities. One should not wait to work on the other: Do both at the same time. Remember, Phase I has two parts. But see if you can stretch to include some part of Phase II. Can you contribute something to your 401k? If money is tight, you don’t need to expect to contribute the maximum to your 401k. If your employer offers a match, work to contribute to get as much as a match as you can afford.
Overlap? Next Step.
If you have paid off or near paying off your debt, or if it is manageable debt such as a fixed mortgage you can handle, and if you have a healthy emergency fund, and you already have been contributing to a 401k, then considering Investing is next.
Why Invest?
The purpose of investing is to grow wealth.
Why Grow Wealth?
The purpose of growing wealth is to have freedom. If you are debt-free, you have more choices. With debt, we are slaves to paying off debt. With no debt, we have freedom to consider other things.
Another Change
We wrote above about spending less than one earns. We wrote about expenses that can be reduced or eliminated. However there is also another way. That is to:
Increase One’s Income
Reducing expenses to meet the available income is great. Also increasing income is great. Doing both is better than only one.
If you can increase your income in your present job, that is a good thing. If your job income is not easily increased, then is it possible to find ways to get some additional income from other projects?
There are a ton of ways to increase income from other projects. Some call this a “side hustle.” Some are legitimate, but some are scams. Be careful.
Complete
OK, that was the complete Simple Basics of How To Do Money.
What is your take on How To Do Money? Use the Contact page to send your feedback or comment or opinion.
The illustrations of birds are from “Birds from The Natural History of Carolina, Florida, and the Bahama Islands” (1754). The Biodiversity Heritage Library of The Smithsonian Institution Libraries.
The Chinese Ornaments are from “Examples of Chinese ornament selected from objects in the South Kensington museum and other collections” (1867) by Owen Jones. The Philadelphia Museum of Art.
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