Day#24: Write down your ideal income and expenses.

Posted by FrugalPinoy on Dec 13, 2009 in 25 Days to Healthier Finances, Financial Tips | 0 comments

This is Day #24 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the final installment of this series, which will be up tomorrow. Here’s today’s installment:

In the income and expenses spreadsheet I use (which I also refer to as my budgeting spreadsheet, though that’s inaccurate), I include an extra sheet titled “Ideal”. This sheet contains my ideal expenses and income. While you don’t need to use a spreadsheet, I think it’s important that we all have a written record of our ideal income and expenses somewhere.

Today’s Task: Write down your ideal income and expenses.

The first thing to do is to grab a sheet of paper (or create a new document in your computer) and write down your ideal income. It’s not enough to write the amount itself, also note where the money will be coming from. How much will come from your job? A side business? Investments?

Then, it’s time to come up with your ideal expenses. First, trim down your expenses on the things you don’t care or need to spend on. For me, that’s cable TV, transportation (I work from home), and dining out. Then, add the expenses that you do want. For example, I want to travel more next year, so I’ll increase the monthly amount I’ll put in my travel fund. I also want to save up early for the holidays in 2010 so I’ll add that as well.

Now, the problem with this “Ideal Income and Expenses” exercise is that many people might have unrealistic expectations of where their finances can go. Here are some guidelines to keeping it real:

• Only include ideal income from things you can control. Winning the lottery, projected returns from stocks and mutual funds, or receiving inheritance do not count. These things come from external forces you can’t control so don’t expect any sure income from them.
• If you have recorded your expenses and income consistently for at least three months, you’ll be able to make more realistic projections because you know your habits, needs, and wants better.

Now, why is this exercise important?

• You have a firm goal to aspire to. “Making more money” and “spending less on unnecessary things” are no longer abstract goals. You know exactly what they mean.
• Working backwards is more specific. By listing your final goal in this way, you’ll know exactly what you want and can work backwards to get it. You’ll also know how much money you need exactly for your ideal lifestyle. This can help you make the right choices when it comes to getting additional income.
• By preparing both your ideal expenses and income, you’re working with both ends of the spectrum. Most people just have goals for one aspect of their financial lives. For example, they want a specific income each month (“Sana P400,000 per month ang sweldo ko”) or they want specific lifestyle changes (“I wish I could afford to travel more” or “Sana may mas naitatabi ako for savings each month”). By noting both your ideal income and expenses, you know that these two work hand in hand. Without additional income, you might not reach your ideal lifestyle. Also, without taking a closer look at your expenses, you won’t know if you already have the means to reach your ideal lifestyle.

So this is what I’ll be doing today – preparing my ideal income and expenses for 2010. I hope you try it too.

What changes do you want to make when it comes to your ideal income and expenses? How specific are these changes?

Image by rore_d from sxc.hu