Once you have determined that you want to use the principles of envelope budgeting, you need to develop a spending plan. Let’s get started with the first step of defining your net monthly income.
Step 1: Define your net monthly income
The first step in developing your detailed spending plan is to determine how much money you have available to spend. In other words, you need to determine your net income.
“For fixed income sources, this can usually be calculated very easily. Most of you receive a paycheck that represents your net pay. This net amount is what’s left after taxes and employee benefits like insurance have been subtracted from your gross pay. Next, you need to look at how often you receive your paycheck. If you receive one paycheck each month, your monthly income is simply the net amount of that check. If you receive a paycheck twice each month, your net monthly income is the net amount of your check multiplied by two. If you receive a paycheck every other week, you need to multiply the amount of your paycheck by 26 (the number of paychecks you receive in a year) and then divide this amount by 12. Finally, if you receive a paycheck once each week, you need to multiply the amount of your paycheck by 52 and then divide this number by 12.”
“Let’s move now to calculating your net income from variable income sources. Variable income sources include commissions, bonuses, and other sources of income that may vary in amount and frequency. Because of these variations, you need to be cautious with respect to your approach to calculating the amount of net monthly income. If you receive a commission payment every month, you can use either the smallest monthly commission received over the past several months, or you can calculate the average amount received each month. The same is true for bonuses.”
“Financially fit people whose sole source of income is variable find ways to set money aside when they receive it, so they can use it appropriately until they receive their next paycheck. Generally, these people determine their total monthly spending requirements and then use this number as their calculation of the amount of income they need to allocate to monthly spending. This way, they do not spend more than they have allotted, and they will have the appropriate amount of money set aside for future spending requirements.”
Once you have completed your calculations for both fixed and variable income source, add those numbers together. This total represents your monthly net income. For more information on calculating your net income from fixed or variable income sources, please read Money for Life, Applied Principle 10.
Join us again soon for Step 2 of creating your spending plan.
Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith