CHAPTER 3 INCOME AND EXPENSE ANALYSIS A first step towards taking charge of your finances is to organize your income and expenses. EZ-$-PLAN's template file INCEXP helps you collect, organize and update this information quickly and easily. Many people don't look much beyond whether their checking account is maintaining a positive balance, or whether the account is rising or falling. INCEXP helps you take a more sophisticated look at your income and expense situation. For example, INCEXP will help answer whether you can readjust your saving and spending patterns in order to carry that higher mortgage needed for that new home you've been planning. Table 3.1 shows a sample income and expense file prepared by Bill and Hope Planner (EZ-$-PLAN file INCEXP). This analysis is structured on a monthly basis because many recurring expenses occur monthly and check receipts are received and analyzed on a monthly basis. The items are organized into four categories: income, fixed expenses, variable expenses and net income. Persons starting new analyses may wish to track their income and expenses for several months before projecting average monthly or annual data. If you input your data for three months in columns B, C and D, INCEXP will automatically ompute average income and expenses for this 3-month period. More accurate projections can sometimes be made if data is kept for more than three months. On the other hand, your financial picture may be changing so fast that a given set of averages may soon become obsolete. PREPARING YOUR OWN INCOME AND EXPENSE ANALYSIS To prepare your own income and expense analysis, do the following: (1) Boot-up your PC. (2) Change Directory: Enter C:CD\ASEASY Ret. (3) Load AS-EASY-AS: Enter ASEASY/P/CTR Ret. (4) Load INCEXP file: Enter /FR Ret. Move cursor to PERSDAT file, Ret. (5) To enter data for this template, move the cursor to the desired cell locations and enter the data. (6) To save your data, Enter: /FS Ret. INCEXP1 Ret. We suggest that you save your personalized file using a new file name such as INCEXP1 so that EZ-$-PLAN's original blank file, INCEXP, may be saved for another time. ENTERING INCOME DATA Once INCEXP is loaded, you may move the cursor to the appropriate cell and proceed to input your personal income and expense data. Sources of income may include: gross salaries, rental income, interest, dividends, and net business income. 15 Chapter Three Table 3.1. Income and Expense analysis (INCEXP) Last Update: June 1988 A B C D E F 3 Bill and Hope Planner 4 37 Technology Dr., Phila., PA. 5 -------------------------------------------------------------------- 6 INCOME JUNE JULY AUGUST AVERAGE PERCENT 7 Bill's wages 3,368 3,368 3,368 3,368 49 8 Hope's Wages 2,808 2,808 2,808 2,808 40 9 Rental, Net Business Income 700 700 750 717 10 10 Other 0 0 142 47 1 11 Total Income 6,876 6,876 7,068 6,940 100 12 -------------------------------------------------------------------- 13 FIXED EXPENSES 14 Federal Tax 1,018 1,018 1,018 1,018 16 15 State Tax 150 150 150 150 2 16 FICA 500 500 500 500 8 17 Property Tax 212 212 212 212 3 18 Savings - Hope 150 150 150 150 2 19 Savings - Bill 343 352 352 349 5 20 Retirement - Hope 86 86 86 86 1 21 Retirement - Bill 105 112 112 110 2 22 Mortgage 535 535 535 535 8 23 Rental, Business Expense 394 394 530 439 7 24 Personal Loan 142 142 142 142 2 25 Life Insurance 37 0 126 54 1 26 Auto Insurance 0 181 199 127 2 27 House Insurance 0 0 190 63 1 28 Association Dues 17 17 17 17 0 29 Kids: Music, Gymnastics 69 0 220 96 2 30 Baby sitter 240 0 96 112 2 31 Electricity 138 0 276 138 2 32 TOTAL FIXED EXPENSES 4,136 3,849 4,911 4,299 67 33 ------------------------------------------------------------------ 34 VARIABLE EXPENSES 35 Food 433 536 146 372 6 36 Phone 34 34 35 34 0 37 Medical and Dental 25 76 150 84 15 38 Clothing - Credit Cards 72 1,055 30 386 6 39 Presents and Contributions 35 70 35 47 1 40 House and Lawn 26 485 155 222 3 41 Miscellaneous 28 0 0 9 0 42 Cash Expenses - see table 610 750 690 683 11 43 Entertainment 31 42 28 34 1 44 Business Expense 213 77 327 206 3 45 Auto 0 0 31 10 0 46 Vacation 0 0 0 0 0 47 TOTAL VARIABLE EXPENSES 1,507 3,125 1,627 2,086 33 48 ------------------------------------------------------------------ 49 TOTAL EXPENSES 5,643 6,974 6,538 6,385 100 50 ------------------------------------------------------------------ 51 INCOME - EXPENSES 1,233 -98 530 555 8 52 ------------------------------------------------------------------ 16 Chapter Three (Table 3.1. continued) 53 TAXES TOTAL 1,880 1,880 1,880 54 % OF Income 27 27 27 55 SAVINGS TOTAL 684 700 700 56 % of Income 10 10 10 To input salary data, we suggest that you get out your pay stubs and input your gross salary into cells B7 and B8, if you have a spouse. Those paid on a bi-weekly basis will usually have two pays per month. If you were paid twice last month, sum the two pays and input the data in cell B7. About twice per year, biweekly employees receive three pays in a single month, since there are 26 bi-weekly pays per 12 month period. Since bills usually come on a monthly basis, this third pay will seem like a bonus. Some people are paid on a twice per month basis, others have a more variable interval and amount. A more variable income requires a more conservative income and expense budgeting plan. ENTERING FIXED EXPENSE DATA Next, determine the categories and amounts of fixed expenses. Fixed expenses are those items whose cost is largely predetermined. Fixed expenses may include some items that require payment during a particular month of the year, such as insurance. Main categories of fixed expenses may include: taxes (federal, state, social security, local and real estate), automatic savings, retirement fund, rent, mortgage, electricity and insurance (homeowners, life, auto and business). To accurately track how much income is spent on taxes, separately itemize gross income and the amounts that go to the various tax categories. Think of set-asides for savings and retirement as fixed expenses. One way to do this is to set up an automatic payroll withdrawal plan with your employer (pay yourself first!). This helps to cultivate regular savings habits. Regular savings helps you to reach those large long-term financial goals such as retirement and college education. One problem many people have is to determine how much of their current income they should set aside to meet long-term goals such as a down payment on a house or car, financing children's education and retirement. In the chapters on financing college education and retirement, EZ-$-PLAN helps you determine regular monthly savings amounts required to meet various goals. Once you have estimated the monthly savings required for your long-term goals, use INCEXP to help you readjust your savings and spending patterns. The Planners have set up separate payroll deductions for savings and retirement accounts (see table 3.1). Finally, pay as many expenses as possible by check or credit card. This way, monthly statements may be reconciled against cancelled checks and receipts. 17 Chapter Three ENTERING VARIABLE EXPENSE DATA Next, determine the categories and amounts of variable expenses (see the Planner's choice of categories in table 3.1). Main categories include: food, telephone, medical and dental, clothing, presents and contributions, auto, house and lawn, vacation and entertainment and cash. Bill and Hope summarized monthly cash expenditures as shown in table 3.2. Table 3.2. Monthly Cash Expenses of the Planners Lunch-Bill $ 69 Lunch-Hope $ 55 Lunch-Mary $ 28 7-11 foodmart $100 Gasoline $120 Miscellaneous $140 House and lawn $100 ---- Total $590 One way to track cash expenses is to record each cash purchase as you make it using a small pocket notebook. These entries may be categorized on a monthly basis when cancelled checks are analyzed. Weekly pocket planners such as the Day-Timer(TM) are particularly useful for recording and analyzing cash expenses. RECONCILIATION OF BANK AND CREDIT CARD STATEMENTS Most expense items may be tracked and organized on a monthly basis by reviewing cancelled bank checks and credit card statements. In addition, most people like to reconcile their bank statements with their check register (records of checks written) or via their cancelled checks to confirm that no errors have occurred at the bank or in their check register (especially unfavorable ones). Also we recommend that you save your receipts from use of credit cards to reconcile these with the monthly credit card statement. ANALYZING INCOME AND EXPENSES Bill and Hope plan to move to a more expensive house, so they want to do a careful income and expense analysis to see how much of an increase in mortgage payment will be prudent. They track their current income and expenses for three months. EZ-$-PLAN's INCEXP automatically computes averages from these three months. Also, INCEXP computes in column F the percent of total income for each line item. For example, Hope's wages account for 40% of the family's income (see cell F8 of table 3.1). 18 Chapter Three Similarly, INCEXP computes the percentage of total expenses for each line item of expense. For example, the Planner's current mortgage of $535 accounts for 8% of their total expenses (see line 22 of table 3.1). Fixed expenses account for 67% (cell F32) of total expenses (cell F49). Net income, shown as income minus expenses in line 51, ranges from -$98 to +$1233, and averages $555. INCEXP calculates that the total taxes, i.e., the sum of federal, state, FICA and property taxes, is 27% of total income, see lines 53 and 54. More than one quarter of the Planner's income goes right out again in taxes! The Planner's payroll deductions for savings and retirement, items 18 to 21, is 10% of income, see lines 55 and 56. The average American family saves just 4% of their gross income, while average savings for families in Japan and West Germany is 20% and 12% respectively. Economists recognize that for Americans to maintain their standard of living, more saving and good investments are needed. On a personal level, proper levels of savings and good investments are usually a prerequisite for your own improved standard of living. The Planner's 10% average savings is well above American standards, but low by Japanese standards. What should your personal savings rate be? EZ-$-PLAN helps you determine monthly savings needed for college education, major purchases such as a home down payment, business investments and retirement. We suggest that you work through the education, financial calculator and retirement chapters of this book and the related software and then determine what your monthly savings needs are for these and other items. Then, utilize the file INCEXP and prepare a proposed income and expense plan to see what changes would be necessary to fit these new items into your income and expense budget. The family can then see how much reduction in their current spending habits (if any) might be required to achieve long-term savings goals. You can brainstorm about how to equitably pull together to meet these financial goals. After reviewing the chapter on saving for their children's education and for their retirement, Bill and Hope decided that they needed to increase their savings for both college and retirement funds. They now know what reduced current expenses are necessary to generate increased savings. Unlike the US Government, families can not operate for long with a negative net income. Indeed, on average, the Planners' net income is positive. This average net income may be added to the savings amount or it can be spent on large purchases. Update INCEXP periodically, especially as you plan major financial events such as taking on a larger mortgage. Update INCEXP using current or projected data appropriate to your income and expense analysis. We suggest that you save the original blank INCEXP template for future use, and that you store your new customized files under related file names such as INCEXP1 and INCEXP2. 19 Chapter Three You may wish to add additional line items of income or expense to INCEXP. This can be done by inserting additional rows in INCEXP. You may also wish to add more months to the analysis. This can be done by inserting additional columns. See the Expresscalc appendix for commands to do this.