Helping individuals and businesses manage their debt is one of the most challenging and rewarding aspects of my profession. The first question I ask is “What is your monthly budget?” Most of the time, I get a blank stare in response. Having a budget for our personal and business expenses is the first step to financial freedom.
A budget consists of two parts: Income and Expenses. In the case of an individual, the first step is to determine the monthly income. That can include business income, wages, interest, rental income, etc.
If an individual is self-employed or operates a business, before determining income, we must determine business “revenue.” That is the amount of monies collected. After figuring out the revenue, the necessary business expenses are deducted from the revenue. This yields the “business income.”
After an individual’s income is calculated, then we must deduct the necessary monthly household expenses. This includes housing, utilities, transportation and food. Entertainment is considered “disposable income.” This disposable income is what we have to work with for savings and or other expenses that are not necessary, but may be desirable. This money can be used to fund a retirement account or college savings account or save for other investments.
If an individual’s monthly disposable income is zero or less, then there is no money for savings or luxuries. In this situation, it can be tempting to get into debt to finance those things we cannot really afford. Resist the temptation. It is a sure ticket to bankruptcy court. If the budget yields a negative amount, then measures must be taken to turn the situation around. That is, increase income and/or reduce monthly expenses immediately. Otherwise, you will use credit and only postpone the inevitable.
Of course there are circumstances when we have little choice but to use credit to finance an emergency, such as medical care, loss of employment, etc. Planning for these eventualities is called “risk management.” Insurance policies that give you benefits in case of unemployment or disability can help in some situations. Of course medical insurance is vital to avoid incurring debt because of illness.
Whether we barely make ends meet each month or we have money to spare, a budget is critical. Seeing our budget on a piece of paper is a good reality check and can save us from financial trouble.
For more information please contact Susana B. Tolchard at 661-287-9986 for a free consultation about debt-related issues, business and estate planning.