Principle #1: Identify Your NET Income

June 21, 2012 § 2 Comments

Ignorance is bliss, until you’re bankrupt.

The key to the first two principles is that knowledge is power. If you don’t know exactly how much is coming in, you’ll have no idea how much you need to cut going out. So the first logical step is to: Identify your NET Income.

Net Income Defined

Investorwords.com defines “net income” for an individual as:

Gross income minus taxesallowances, and deductions. An individual’s net income is used to determine how much income tax is owed.

According to Orrin Woodward, “Your Gross Income is the amount you tell your friends that you earn, while Net Income is the amount you tell your spouse.”

For simplicity sake, we will use a salaried employee as an example. If a person is salaried at $50,000 per year and is paid twice monthly, his GROSS Monthly Income is $4,166.67 ($50,000/24 paychecks =2,083.33 x 2 paychecks per month). While this amount is important to know for calculation’s sake, it is otherwise irrelevant. This person’s actual income is NOT $4,166.67.

Take that Gross Monthly Income figure and subtract all those wonderful government programs that you are unwillingly volunteering to fund (ie. Federal and State Income Tax, Social Security, Medicare, etc) , subtract your medical, dental, vision, and FLEX benefits (assuming you have those), and subtract your 401K contribution. For this example we’ll assume that after subtracting these items, the direct deposit to the bank is roughly $3,400.

Personally, I wouldn’t stop there. The Bible talks of your tithe as your “first fruits”. So, if you believe that the Bible is true, and you claim to trust God with all areas of your life (including finances), I would strongly suggest tithing from your Gross Income because that is your true first fruits. Trust me; you will not regret it. This should bring us to a true NET Income of $2,983 ($3,400 – $417 tithe).

Do the same calculations with any second income or other guaranteed income (pensions, annuities, etc). As a rule, be conservative in calculating your income, and liberal when calculating your outgo.

NO “If-Come” Money

An important note that Orrin makes in his Resolved book is that you should NEVER count on potential raises, bonuses, or windfalls of any sort. This is considered “If-Come” money. “If I get a raise, then I’ll be able to pay off my debt.” If-come money doesn’t pay the bills, only Income will – especially income with a solid plan and discipline behind it.

Go Do It!

To conclude, I would encourage you to sit down with your pay-stubs, calculate your net income and tithe amounts, and prepare yourself for one of the most gratifying experiences of your life. Resolving to develop financial intelligence can be a tough and daunting task, but let me tell you this, if you stick to it and learn to change your old habits, you’ll wake up with a smile knowing that no one owns you anymore!

Did I miss anything? Leave a comment below.

Stay tuned for Principle #2: Expenses…..

Keep Reading and Leading!

David J. Garza

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