A few mistakes may have the impact of ruining a good credit report and may make it difficult for them to avail loans and procure insurance. It is imperative to have a good budget in place since one should always be aware of the income and the anticipated expenses, so that he/she may be able to handle unforeseen expenditure without getting into debt.
Know the Difference Between Gross and Net Income
It is impossible to prepare a good budget unless one knows the difference between gross and net income. The gross income for a consumer is the total personal income that includes the given items:
- Wages, salary, tips, ordinary dividends
- Taxable interest, capital gains (losses), taxable amount of pensions and annuities
- Business income, alimony received, unemployment compensation received
- Rental income from real estate
- Taxable amount of IRA distributions income from royalties, trusts, taxable refunds, and taxable amount of Social Security benefits
Although the list may seem daunting, a working knowledge of the aforementioned items will go a long way in helping one prepare a suitable one. Some of these may not even apply to young people who have not started investing.
Again, as far as budgeting is concerned, the items like alimony and unemployment compensation are not applicable. However, it is good to have an understanding of all the items that come under the purview of gross income. Given items are deducted from gross income to arrive at Adjusted Gross Income (AGI) or Net Income:
- IRA contributions, 50 percent of self-employment tax, and moving expenses
- Interest paid on student loans
- Contributions for health insurance made by the self-employed
- Penalties for early withdrawal of savings
- Alimony payments
- Contributions to Simplified Employee Pension plan and SIMPLE IRA, contributions to other qualified retirement plans and deductions for MSA ( Archer Medical Savings Accounts), etc.
Know How Taxes are Calculated
Tax bracket for the consumer is calculated using the AGI. The adjusted gross income is also calculated to determine the qualifying credits and allowable contribution limits for tax-deferred retirement accounts. Income tax is computed by subtracting itemized deductions from adjusted gross income (net income).
It is believed that a consumer should not spend more than 33 percent and 11 percent of the gross monthly income on home mortgage and car loan payments respectively. Had people focused on spending within their budget, the subprime crisis could have been averted.
This is advisable since good investments result in the growth of finances. This, in turn, can help people to live a comfortable life and enjoy the present without having to fear the dearth of funds in the days to come.
Thus, these are some tips that may prove to be useful for those who are unsure about income, the computation of taxes, and savings and investment, and are in a dilemma when it comes to the best course of action for the future.