How much do you really have to earn to survive? Part 2 of 2

Establishing your realistic personal budget will guide you to fiscal safety.

Do you know if you actually earn enough income to realistically cover your monthly expenses? Have you figured out how much additional income you really need to earn to do so? Budgets are a simple way to outline your income and expenses.

In part 1, we illustrated how to figure out your monthly income and expenses. In this part, we will take that information, and calculate how much you have to really earn to cover you monthly expenses and hopefully have additional income to put away in savings.

Calculate the net impact of this budget by subtracting your total expenses from your net income. If you realize a positive net income, you are in good shape and should continue to stay on top of this to avoid slipping into fiscal troubles.

Now, if you realize a negative net income, like in our example, $3,500 - $5,000 = -$1,500, how do you figure out what you need to increase your income, or reduce your expenses, to realize a positive net?

Here are a few tips on how to do just that.

Realistically cut expenses where you can, if you can

This can be done as simply as cutting some of your expenses, however may not be practical in many cases. If your spending on unnecessary or discretionary items can be trimmed to help put you into a positive net position, then you should make those sacrifices in the short run to remedy your fiscal situation.

However, you have no control over the utility bill, mortgage payment, loan payments, etc. These are typically fixed and recurring payments that you have very little ability to reduce.

Also, it can be a reasonable expectation that a certain amount of discretionary spending will occur monthly. Careful consideration and balance should be considered.

Increase income

So, how do you know how much you need to increase your income to? First you need to calculate the approximate deduction percentage that is being taken from your gross monthly income. To do this, subtract your net income from the gross to calculate your total deductions. To show as a percentage, divide total deductions by gross, then multiply by 100. This will be your deduction percentage.

Step 1: Gross – Net = Total Deduction

Ie:  $5,000-$3,500 = $1,500

Step 2: (Total Deductions / Gross) X 100 = Deduction percent

Ie:          ($1,500 / $5,000 = .30) X 100 = 30  percent              

With our example from part 1, we identified that we have $5,000 per month in expenses, however only bring in a net of $3,500 in income. Therefore, show a net loss of $1,500 per month-(see below):

Income:                     $3,500

Expenses:                 $5,000

Net Income/Loss:      ($1,500)

**Based on this example, a net loss of $1,500 is realized monthly, equating to approximately $18,000 per year. Therefore, an additional $18,000 plus 30% per year is needed to break-even equating to $23,400 more per year. The effect of this would be increasing from $60,000 in gross income to at least $83,400 per year.

Once armed with this information, you can confidently know what you may need to “really” earn to cover all of your expenses. Regardless of what you determine as your level of fiscal health, keeping an eye on your personal and household finances should be an ongoing venture.

Michigan State University Extension offers a variety of programs to provide expertise, education, and development of communities throughout the state of Michigan.

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