LAST WEEK it was established that, besides the funds which you hold in cash, you give your money earned to other people. You were also asked to make an assessment of how much of your gross pay you consume, as against saving and investing.
It is important that you record this assessment in writing somewhere for future reference. Today we move on to the next exercise.
The first step is to identify all sources of your weekly or monthly pay/income and to record and total the gross amounts received. It is important that you noted the gross amounts earned before any taxes or other deductions are made. Examining the gross amount earned provides the opportunity for considering how all deducted amounts are disposed.
For example, consider why you pay taxes. What do the tax amounts fund? Is there any additional benefit that you can draw from the payment of these tax amounts?
Yes, taxes fund Government expenditures, and there are Government services and facilities which you can utilize to your benefit – say, community centres, parks, polyclinics and other public services. It is hoped that as you realized that you have helped pay for all such services and facilities, that you’d be more interested in finding out more about them and in seeking ways to avoid unnecessary expenses by drawing on the available and free Government services and facilities that are useful to you.
Similarly, looking at other deductions, the same process applies. Consider National Insurance Scheme deductions. You need to be aware of the benefits that are relevant and useful to you and ensure that you draw on such benefits as necessary. Deductions for your employers’ group health and pension plan and any other company-related deductions should also be examined in the same way.
Although taxes, national insurance and the health plan payment may have some element of saving and investing, please list them as consumption for now. Contributions toward a pension plan can be listed as savings and investment.
Most of us also have other deductions which we have requested payroll to make and then to pay as directed on our behalf. For example, deductions may be made for a mortgage, a bank loan, or for the credit union. These payments need to be examined as well in order to assess the extent to which the payment is for consumption versus for savings or investment.
You can seek help from your loans officer at the bank or credit union in order to assess how much of any loan payment should be allocated to loan principal repayment and how much to interest.
With this information, you are just about ready to start the next exercise. This exercise requires that you take all of your gross pay and allocate it into two columns – one headed consumption and the other headed savings and investments. Then you can start by allocating all those deductions that you have analysed to the relevant column.
However, you still have to account for the net pay amount: you are required to start by keeping a note of every payment made, no matter how small, in a notebook for each day . . . for the entire month. Be careful to keep specific track of small cash payments and ensure that every cent spent is noted.
On a monthly basis, all amounts spent, saved or invested should then be analysed and added to the relevant column. This exercise will fulfill accounting for every cent earned.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.
