Wednesday, March 17, 2010

Doing Business

The world of money and credit treats you as if you were a business. They look at income, assets, liabilities, cash-flows, and all the rest of it. Your bank treats you like a business; economists regard households as economic entities. The time has come for you to look at yourself as others do.

So, brew (or buy) some coffee, get out a calculator, a notepad, pay stubs, and bank statements, and get ready to run some numbers.

1) Start with your pay stubs; ideally, you’ll want at least three months’ worth, but the experiment works even if you’ve only got your most recent one. Add up your total monthly take-home pay. This is your Revenue.

2) Now grab your bank statement or statements for the month or months matching your pay stub or stubs. Note the regular monthly expenditures by category; if last month you had to get a new hot water heater or something, leave it out - it’s a one-time thing, and so doesn’t have much bearing on this exercise. These are your Expenses.

3) For each category of regular monthly expense, divide the monthly payment amount by your monthly take-home pay. These are your Expenses by Category.

All right, after you’ve done this little exercise, you need to take a good, hard look at that list. Housing (rent or mortgage, plus property taxes) should be at or near the top of the list. Transportation (car payment, if any, gasoline, etc.) or food (include groceries AND any take-out or sit-down restaurant meals) might be the number two or number three items, depending on your circumstances.

All of your Expenses, all those regular, big expenditures you make in order to keep a roof over your head, food on the table, and gas in the car, that’s your Overhead, or what it costs you to stay alive.

Now, while I don’t want to tell anyone how to live, I do want to suggest to you that none of your top three expenses had better be more than 30% of your take-home pay. I’ll go further, and say that your top two expenses had better not add up to more than 50% of your take-home pay.

Revenue or Income?

Revenue is everything in the way of cash and value that you bring in. Your paychecks, dividends, what-have-you, well, that's Revenue.

So, what's Income?

Prepare to be depressed, because Income is Revenue minus Overhead. So, taking the figures from the little exercise above, tote up all your Revenue, then subtract your Operating Expenses, to find out your Income.

I'll pause while you wipe the tears from your eyes and pick up your jaw from the floor, because chances are, your Income is not what you thought it was, and is not all you'd like it to be.

That's business for you.

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