Family Budget: Income

A family budget consists of three parts – income, expenses, and savings. To create a workable financial statement for a family, all three parts must be understood. Each of the parts is similar to corresponding parts of a business budget, but the family’s budget has different perspectives and different priorities. A business accountant is often a poor financial planner to a family due to these differences.

Almost always a family budget is based on a monthly time frame. That is the time frame used in this analysis.

Income is how much financial resources are available to the family. Ignoring savings, a family typically has three sources of income. By looking at each source in detail, we can understand this part of the budget.

Active Income

Active income is what is earned by activity. This stream of income generally takes the form of a paycheck, although other sources can be included, such as yard sales and other direct sources. When looking at a paycheck, there are two things to remember.

The first thing to be clear on is how many paychecks occur in a month. If paychecks come every week or two weeks, there will be an extra paycheck every 3 or 6 months. It is wise not to include this extra paycheck in planning a budget; instead save them or use them for special purposes. Make the financial plan based upon the usual number of paychecks.

The second thing to remember is that there are two income numbers on the paycheck, gross and net. Net income is the income on the actual check, after all deductions have occurred. To increase this number, each deduction can be analyzed. This analysis is technical, and is part of the expense analysis. Here all that will be said is to use the net income amount for the monthly financial plan.

Passive Income

Passive income is income from sources not active. The typical examples are investments and royalties. When considering passive income, remember not to include such things as retirement plans and education funds; these monies are not available to the monthly budget. Also, the schedule of payments is another critical factor. If they are not paid monthly, then a separate plan for this income stream needs to be linked to the main plan.

Third Party Income

Third party income is income that is completely out of the control of the family, unlike investments. Examples of this income are settlements, government programs, and the like. While these income streams can be included in the plan, they need to be monitored very closely for any changes. Since the changes are not controlled by the family, the only thing to be done is to react quickly to any changes in these income streams. Any estimates on these income streams need to be very, very conservative.

Merging Income Streams

The purpose of this part of the family budget is to arrive at a valid, workable number for the monthly income of the family that is both consistent and reliable. Most people over-estimate their income and under-estimate their expenses and wonder where the money went. Understand income streams and half the confusion is gone.