You probably know your hourly rate of pay. If you don’t, you can just look at a pay stub to find out. But is that figure really accurate? What is your real income?
Your real income is your take-home pay. Your rate of pay may be $10 per hour, but I doubt you actually have that $10 per hour in hand on payday. So even if that’s what you earn, that won’t necessarily be the amount that you get paid.
You’re probably thinking what is she talking about? $10 is $10! Realistically, $10 is only $10 before taxes and other deductions.
For example, if you earn $10 per hour, and work 8 hours per day, 5 days per week, for 2 weeks (the average pay period), your gross income would be $800 per pay period, but your paycheck probably isn’t $800. Your paycheck, your “take-home pay”, may only be $685. So, your net income is $680 per paycheck.
Instead of earning $10 per hour, you’re actually only receiving $8.50 per hour, or 85% of your hourly rate. That would make your real income only $8.50 per hour. Remember, your real income, the income with which you use to budget, isn’t your rate of pay. You don’t have $10 per hour with which to budget, you only have $8.50.
You can use the following formula to figure out your hourly net income.
hourly rate x hours worked = gross pay
net pay/gross pay = hourly net income
$10 x 80 = $800
$685/$800 = 0.85 or 85%
0.85 x $10 = $8.50
real income = $8.50 per hour
Budgeting is sure to fail if you don’t budget based on your real income. If you budget based on your hourly rate of pay, you’ll spend more money than you receive each month. That cycle depletes savings and causes debt.
Budgeting based on your income may sound simple, but if you don’t know to budget from your real income, your budget just won’t work. I encourage you to check your deductions at least once every six months. You need to be knowledgeable about your finances if you want to be in control of them. It’s not difficult or time-consuming. It’s just a quick check using the example above. You can do it! Stay in control of your finances by knowing what they are!
Article by Randi Millward