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Identifying Income: Budgeting 101

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There are two sides to a budget – Income and Expenses.

Many when they build a budget will take their most recent pay and use it to determine how much  income they have coming in every month. This will start their budget off by several hundred dollars!

First many get paid on a bi-weekly (every two weeks) basis. So simply multiplying by two will have you underestimating your income by 8.3%! This could represent your retirement savings!

Second Some of the deductions on your pay are considered expenses and should be put in the expense column. So you may end up double counting these expenses. Most common is retirement or pension contributions that come right off your pay cheque. Other items might be life or health insurance premiums, union dues, gym memberships, etc. These automatic deductions can skew your actual income.

Third – Depending on your income and the time of year that you run your budget you may have CPP and EI deduction being taken off or you may not. If you earn $44,000 or more you will max out your contributions to CPP and EI. Once you have reached this amount of income you will no longer have those deductions.

TIP:  If you make more than $44,000 the easiest way to deal with those deductions is to take the max CPP and EI amounts for the year and divide them by 12 and subtract that amount off your income. (2010 MAX CPP premium $2163.15 /12 = $180.26, MAX EI Premium $747.36 /12 = $62.28 )

If you are self employed, commission income, or variable income; take the income from last year and give serious thought as to whether this years income will be more or less and try your best to estimate what you think you may earn. Speak with your bosses about what they think is realistic and then once you have determined a number take off 20% to be conservative on your budget. Any extra that you do earn can to a seperate fund to pay for your “Nice To Have” goals!

If you have two or more incomes contributing to the expenses you need to do this for each one and add them all together.

To help you identify other income sources such as dividend and investment income, rental income, alimony/child support, etc; it is easiest to take last years tax returns and go through the 100’s and 200’s section of the T1 General. This is where you list all income.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

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