Still Packin' Your Payday Blinders?
Know anyone who thinks everything will be okay as soon as payday arrives? "Come on payday!"
Does that same person, shortly after payday, think everything will again be okay as soon as the next payday arrives? "All I have to do is make it to next payday!"
Focusing on the next paycheck as the cure-all for money problems is what I call wearing "payday blinders." It's like walking a path in deep fog with a flashlight that shows you only the trail ahead. A person who focuses only on the next paycheck is missing out on a whole world of possibilities that lie just out of sight beside the trail.
What if the "payday blinders" were removed? What would be possible with a fog free picture of your income? How can we do that? What would that look like?
Rethinking How To Manage IncomePutting aside the payday blinders requires rethinking both how we look at, as well as how we keep track of our income. Budgeting and tracking expenses are methods that are actually designed to encourage living paycheck to paycheck.
- Budgeting is the dividing of monthly paychecks into spending categories and then keeping a record of everything you spend to ensure you stay within the month's budget limits.
- Tracking expenses is keeping a record of where each paycheck was spent so you can see your spending mistakes after they happen.
- Receiving income.
- Paying out of pocket expenses.
- Paying bills.
- Managing credit cards.
- Setting aside money for anticipated and planned large expenses.
In this post we'll look at what comprises income along with an effective way to keep track of the money being received. You may recognize some elements that are found in most accounting systems.
Your Income Stream
Income is what makes your household finances possible. Receiving income, however, is much more than getting a paycheck.
Your income has two parts: the income you have received and the income that you expect to receive. The bridge between the two parts of income is deposits which convert expected income into received income. Viewed together, expected income, deposits and received income make up what I refer to as your income stream.
Understanding the concept of an income stream, and what an income stream makes possible, is fundamental to effective management of day-to-day personal finances.
Each part of your income stream has a unique purpose.
Expected Income Is A Planning Tool
Expected income, correctly projected over the coming months, with accurate expected receipt dates and amounts, is a powerful planning tool. The projected income can be the basis for the future planning of outgo which includes the other five activities that comprise your day-to-day personal finances:
- Paying for out of pocket expenses (spending money),
- Paying bills,
- Managing credit cards,
- Setting aside money for expected large expenses (special focus items), and
Received Income Pays The Bills
Income that has been received provides the money that will be used for bill and credit card payments plus the planned setting aside of money for weekly out of pocket spending, special focus items and saving plans.
Typically, received income is lumped into one number which is the balance in your check register. Trying to keep track of how your money will be used to meet obligations and accumulated for other purposes is impossible when using just one number.
Accounting for received income, plus keeping track of payments and set asides, requires a set of ledgers. One ledger is needed for each bill, credit card, special focus item and savings plan. With a complete set of ledgers in place, your check register, also one of your ledgers, is relegated to keeping track of your current spending money. This means that the balance in your check register is no longer the total amount of money available in your checking account. Instead, the sum of all of the ledger balances, plus the balance in your check register, equals the available balance in your checking account.
Not all of the money in your checking account will be allocated to the set of bill, credit card, special focus and saving ledgers. There will usually be some money that is not obligated. A "built in" ledger is needed, therefore, in which to keep track of this "cushion" money. Such a ledger would act as a shock absorber, or buffer, against the unexpected minor events that will inevitably happen. The cushion ledger is also where the amount of each deposit is added when each deposit is recorded.
Another built in ledger is needed for keeping track of the spending money that has been set aside and later withdrawn for current out-of-pocket expenses.
Deposits Hold It All Together
While they seem trivial, deposits are actually an important part of your income stream. To ensure that your spending plan, which is based on expected income and executed with received income, can be carried out, deposits must always be no less than the amount of each projected income receipt.
The temptation to keep part of a deposit as cash is best avoided. Direct deposits waylay such temptation and, thereby, help to ensure the integrity of your income stream. Deposited money that is more than the expected amount can be allocated any way you wish after the deposit has been recorded and the total amount added to the "cushion" ledger. Doing so avoids the "where did it go?" question that arises when you realize the cash you withheld from the last deposit is no longer in your pocket.
Don't Try This At HomeAs mentioned earlier, income is only one of six aspects of your total household financial picture. Managing your income stream as discussed in this post is, therefore, something that you probably do not want to try with pencil and paper. The programs we will look at later handle income as part of a complete package. Keep your new appreciation for your income stream in mind as we progress through coming discussions of the other five aspects of your day-to-day finances.
How About You?
Have you been wearing payday blinders? Ready to take them off? When we have finished discussing the five activities that comprise the outgo of your finances, we'll take a look at the tools that are available to help you put all this theory into practice.
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