Updated on 01.31.07

31 Days To Fix Your Finances, Day 4: How Much Did You Earn Last Year?

Trent Hamm

The Simple Dollar offers a month-long plan for fixing your finances. All you need is an open mind and an hour each day.

Yesterday, we developed some very specific plans to achieve aspirations that fit within the context of our personal values. These plans provide the basis for what we should be doing with our money; not only do they guide us towards a goal, but they also serve as a reminder that we’re off track if we do things that oppose the plan.

Now that we have these plans in place, we need to dig into our finances a bit. The first step is to see what income you actually have with which to chase your dreams. This will provide a baseline with which to figure out how we can rebuild our finances.

As before, take out a sheet of paper. Along the top, make a list of each of your employments. For me, I just listed one job (right now, The Simple Dollar is a very involved hobby, not what I would call a “job”). On the right hand side of the paper, write how much you make per year at your job (minus only income taxes – include all benefits, including any employer matching for retirement).

Now, underneath that, make a list of every single extra cost you have specifically because of your job. What does the commute cost? How much does lunch cost if you don’t bring your own lunch from home? What does your work wardrobe cost? What do you spend on going out with coworkers? On small professional gifts for others? On a nicer car or jewelry or other items for “work image”? What about child care? Each of these are expenses related to your job. Just make a list of them; don’t worry about amounts yet.

Here’s my list, if you’d like something to compare it to:
Child care
Driving to work – gas
Driving to work – extra maintenance
Office supplies

Now, for each item on your list, figure out how much it costs you per year. First, figure out how many days a year you work (this is useful for the automotive calculations), then figure out how long your daily commute is. Multiply the two together and you get an estimate of the mileage you put on the car. I drive about 5,500 miles a year for work, so that amounts to roughly 400 gallons of gasoline, at $2.50 a pop (on average), which comes out to $1,000. I also figure that I’ll have to spend about half that much on other maintenance (oil changes, filter changes, and increased risk of major problems): $500. Then I look at child care: $5,800. I usually buy about $300-$350 a year worth of extra clothes for work, and I eat out probably once a week with coworkers, so tack on another $780 ($15 a meal, estimated). I also buy gifts for our gift exchanges at work and some of my office supplies, adding up to nearly $100 a year. Obviously, your calculations will be far different.

When you’ve determined annual amounts for each entry, subtract them from your salary. This will be sort of painful, particularly if you work in an office at the $12-$15 an hour range. The amount you’re left with is your true take-home salary for your job for a year. We used the post-tax number because you’re paying for this extra stuff after taxes.

I know some people who claim to be making $35,000 a year, but when they take their post-tax number and subtract out their job expenses, the number left makes them feel rather worried. It should. Some people even realize that this number takes them down to near the poverty line, and they get quite sick when looking at this number in comparison to other things.

Over the next few days, we’ll take a deeper look at this number and figure out what it really means in terms of your life values.

Ready? Let’s continue on to the next day.

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  1. Ralph Morgan says:

    One of the key things to notice from this figure is that ANY increase in salary can have a huge impact on your disposable income, and hence your ability to save and get ahead. For example, if you earnt $65K pretax and this left $40K take-home pay after taxes, and it costs you $15K to earn you income, then you have $25K of disposable income to spend on food, housing, insurance, education etc. and budget to save a bit (maybe $5K).

    If you manage to get a promotion or change jobs so that you earn just an extra $1K after tax (2.5%), you can boost your savings by 20%! So doing some overtime, or some extra effort to get a promotion, or a change of jobs, can have a much bigger positive impact on your NW than would seem at first glance.

  2. Hmm, my job gets a good boost with free lunch and dinner (if I stay later). The casual atmosphere means that don’t need addition wardrobe. Office supplies are provided, so it’s really just the driving to work and maintenance. With a 20 mile drive it’s lot better than I original thought.

  3. 52 Faces says:

    I’m loving this plan – just discovered it.

    This step is tough, however, because I have always been either a freelancer or student with part-time jobs so my income is unpredictable and has a high variance from year to year. I can only calculate it for these figures for the last year but it may not help me as I have no idea how much I will make in the upcoming year.

  4. GEoff says:

    For me a big “work expense” is dry cleaning. $10-15 a week, every week.

    It may seem like an indulgence, but I’m simply not good at ironing. It would honestly take me an hour to iron a shirt and it still wouldn’t look as good as having it done professionally (spent weeks trying to learn to iron, finally gave up). So I’d be paying myself $1.25 an hour for ironing (the cost of having one shirt professionally cleaned and pressed).

    Still a cost I would not have with a different job.

  5. Jessica says:

    The exercise was not as painful as I originally though. When taking into account my company retirement benefits(which I never did before)and subtracting the expenditure related to work, my take home salary is the same as what my usual salary is(without subtracting the expenditure related to work). Therefore I can conclude that my retirement benefits are actually paying my work clothes, my commute, the drinks with my colleagues, my colleagues gifts and cards and my lunches…

    Day 4 and still going strong! Woo hoo!

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