• Theresa Gray

3 Easy Steps to Maximize Your Monthly Income: Part 1


3 steps to maximize monthly income

Do you want to know how we paid off $110,000 of debt in three years time - without adding another job to our lives? We maximized our monthly income by budgeting.

Wait! Don’t stop reading just because I said the B word.

“But,” you say, “budgeting sucks. It’s boring and takes too much time.”

Would you like to learn where all of your money was going each month? Would you like to tell your money what to do based on your priorities instead of letting debt manage your life?

“Of course I do”, you say. “But my problem is that I need to make more money.”

if you can't control your money making more won't help

Friends listen to me, I’m telling you something important. I have friends who make $30k a year and friends who make $300k a year and I hear the same comments about needing to make more money to fix the problem from all of them.

I can tell you from my own experiences and from talking to people for years about theirs, that being financially fit has nothing to do with waiting until you make more money.

Compare your current income to what you made back when you first started working. It’s probably much, much bigger! Your teenage you would think that your current you was banking big bucks and should have zero money worries! But your current you wants to make more money. Because as you got older, you made more money, you could afford more expenses, and you took on more responsibilities (house, family, utilities, etc.) that tied up your income.

We all know how easy it is to out spend our income, and it can seem like the way to fix it is to just make more money.

You can't out earn your stupidity

One of my favorite Dave Ramsey quotes is, “You cannot out-earn your stupidity. You must make a change in your life.”

Here is how to change your life in three easy steps - you can do it by learning to budget your monthly income.

The first step to budgeting is knowing your income.

This is the most important step.

Budgeting your expenses is step number two.

This is the most important step.

Living within your budget is step number three.

This is the most important step.

1 - Know your monthly income

2 - Budget your expenses

3 - Live within the budget

That’s right! They are all important and your budget will FAIL if you get one part wrong. But failing is learning, so it’s not the end of the world. Because you will get to do another budget for each month, you have plenty of time to get it right!

In fact, I am going to focus on each step in a separate article, so that I can give each enough attention. This post will discuss step 1 - Knowing your monthly income. I will post links here when they are written! Subscribe here so you don't miss out!

Part 1 - Knowing your monthly income

The very most important part of establishing your budget is knowing your monthly income. All the parts of creating a budget are based off of that monthly dollar amount. It is one of those things that seems so simple; so obvious; so easy - that it is not discussed. But, if you want to stop worrying about money; start paying off your debt; and investing in the future you need to pay attention to every little detail in a way that you didn’t before.

"The devil is in the detail" - something might seem simple at a first look but will take more time and effort to complete than expected

What would you do if I gave you a blank form and said, “write down your monthly income”? How would you go about providing me the information?

  • Would you divide your yearly salary by 12?

  • Would you tell me when you were paid (weekly, every other week, bimonthly, and what each paycheck was?

  • Would you average your paychecks? Over what periods? How far do you go back?

  • Would you give me the gross dollar amount (total payment) or the net amount (total minus taxes, Social Security, Medical, 401k, etc.)?

  • What if you worked on commission and you are due money but don’t know when it will be paid? Do you count money due to you?

  • What if you have irregular income from sales, commissions, or tips?

  • What if you only get paid twice a year?

  • What if you are currently unemployed?

I’m sure that you can see how this seemingly simple request quickly gets bogged down by the details.

So lets take a detour and discuss why the answer that you give me matters to getting you on the path to financial wellness.

Your budget it based on your income.

Your spending limit is capped by your income.

Your ability to pay off debt is based on the gap between your income and expenses.

For example, consider Bob and Sue. They each make the same amount of money.

use extra money to pay down debt

In this image Bob is spending more than he makes. His gap is negative dollars. His gap is the amount that he goes into debt each month (on top of whatever other existing debt he has).

Sue, spends less than she makes. Her gap is the number of dollars that she has ‘extra’ each month. Her gap is what can be used for creating an emergency fund, paying off debt, and setting herself up for retirement.

Your monthly income will be the upper limit of what you're able to spend for the month. If you over estimate your limit, the gap will change - possibly from ‘extra’ money to debt.

don't over estimate your income

So, if Bob and Sue were both equally overestimating their income the image shows that Bob is going more into debt than he originally thought, and Sue isn’t getting extra money, she is actually overspending, and gaining debt.

Here is an example framed in a different scenario.

I got a fitness tracker for Christmas two years ago and wore it all the time. My plan was to measure my physical activity, track the food I was eating, and then lose some weight!

The app for the Fitbit let me put in my age, gender, height and weight and then it calculated my Basal Metabolic Rate (BMR) as 1590. BMR is an estimate of how many calories your body burns at rest.

So if [Calories Burned at Rest (BMR) + Calories Burned in exercise - Calories Eaten] is greater than zero (positive gap) then I would lose weight because I burned more calories than I consumed. If that number is less than zero, (negative gap) then I would gain weight because I ate more calories than I burned.

For example: Let’s say that in one day I ate breakfast, lunch, snack, dinner and a sugar cookie for a total of 2000 calories. I also exercised and burned 500 calories. Based on the Fitbit app, my body burns 1590 calories at rest.

1590 (calories at rest) + 500 (calories burned) = 2,090 calories burned

2,090 (calories burned) - 2,000 (calories eaten) = 90 calorie burned

So, for that day, I burned 90 calories more than I took in, so I should be able to lose weight.

It seemed very mathematical (and you know how much I love math)!

But, even though I was doing a good job tracking my calories, and was making sure that each day I didn’t eat more calories than I was burning, I was not losing weight.

C’mon math! You’re better than this!

I decided to go see a dietitian to find out what I was doing wrong.

The first thing she did was to hook me up to a machine that measures my actual resting metabolic rate.

She confirmed that my Fitbit estimate of 1590 was what I should be burning, but told me that my measured rate was only 1290 cal a day. So I was off by 300 cal every day! My body wasn’t burning what I had thought it should be burning, and by using that BMR, I had been letting myself overeat by at least 300 cal a day, or 2,100 calories/week. No wonder I couldn’t lose any weight! My assumption was wrong.

Here’s a funny side note - to get my Fitbit to give me the correct BMR, I had to reprogram it to think that I was 4’6” instead of my 5’11”!

But the moral of that story is that even though I was tracking like a champ, I was overestimating my calories burnt. My upper limit was wrong, so my gap wrong.

Obviously the same thing goes for your financial health. If you think you have $10,000 a month to spend but you're only getting paid $9,000 a month you'll be over spending by at least $1,000.

Calculating Monthly Income - Regular Payments

As in my calorie example, it is better to err on the lower side, so that you can ensure that your planed spending falls below that line.

For some people determining what monthly income to use is an easy step because you have a regular income. Your paycheck is probably about the same each month.

Use the information in this chart to help you determine your monthly income.

regular salary monthly income calculator

If you are paid every other week, then there will be a few months a year that you get paid three times! Be sure to budget based off of the normal twice a month numbers.