Your money plan · Step 2

Step 2: Income & expenses — where does your money go?

A budget is simply a plan for your money: how much comes in each month, where it goes, and what is left. Companies publish an income statement every year; a budget is your own personal income statement — written in advance, so you decide instead of wondering.

👴 In one sentence Write down what comes in, what goes out, and make sure the second number is smaller than the first.

Step 2a: Calculate your income

In step 1, Sam — our made-up 28-year-old with a full-time job — opened an emergency account using a rough estimate of their bills. Now it's time for the full picture, starting at the top. Sam's salary is $3,800 a month before tax, but after income tax and social contributions, $3,000 actually lands in their bank account. That is the number that matters.

💡 Gross vs net pay Gross pay is the salary in your contract. Net pay (or take-home pay) is what you receive after tax. Always budget with net pay — you can't spend money the tax office keeps. It's the same idea as revenue vs net income in a company.

List every source of money that reaches your account, and turn each into a monthly figure:

Salary — net, as it arrives. If you get 13 or 14 salaries a year, or an annual bonus, don't count them as monthly income: use them for goals or the emergency fund.
Side income — freelance work, tutoring, selling things online. Use a cautious average of the last 6–12 months.
Benefits and allowances — child benefit, housing support, meal vouchers.
Irregular income (freelance, commission, tips) — budget on your lowest recent month, and treat anything above it as a bonus for savings.

Step 2b: Calculate your expenses

Download the last one to three months of bank and card statements and sort every payment into a category. Then add a monthly share of irregular costs (gifts, car service, annual subscriptions ÷ 12). The result is your real budget.

Sam's monthly budget

Read it like the company statements in this course: money in at the top, costs subtracted, what's left at the bottom. The arrows explain each line.

Sam — Monthly budget in $

Take-home pay3,000

Net salary after tax. Sam's "revenue". Add any side income here too.

FIXED COSTS — the same every month

Rent(900)

Usually the biggest line. A common guideline: keep housing under about 30% of take-home pay. Sam is at 30%.

Utilities & internet(150)

Electricity, heating, water, internet. Moves a little with the seasons, but hard to avoid.

Phone & subscriptions(60)

Streaming, music, gym, apps. Small amounts that renew silently — check this line once a year.

Insurance(90)

Health, renters' or car insurance. Protects the budget against a big, unexpected bill.

Minimum debt payments(150)

Credit cards and a student loan. Must be paid every month — like a company's interest expense. (Step 4 shows how to get rid of it.)

Total fixed costs(1,350)

45% of take-home pay is gone before Sam buys a single sandwich. Fixed costs are hard to cut quickly — choose them carefully.

VARIABLE COSTS — Sam decides each month

Groceries(350)

Necessary, but how much is up to Sam: a shopping list and cooking at home make a real difference.

Transport(150)

Public transport pass and the occasional taxi.

Eating out & coffee(200)

$4 a day on coffee is about $120 a month — and $1,460 a year. Small daily habits add up.

Fun & hobbies(120)

Cinema, concerts, books. A budget with zero fun is a budget nobody follows.

Clothes(100)

Irregular in reality (a winter coat in November), so Sam sets aside an average amount every month.

Holiday fund(150)

A summer trip costs $1,800. Saving $150 a month turns one big shock into twelve small, planned steps.

Total variable costs(1,070)

This is where a budget gives Sam the most control.

Left to save each month580

3,000 − 1,350 − 1,070. Sam's "net income": money that can build an emergency fund, repay debt faster or be invested.

Savings rate = 580 ÷ 3,00019.3%

The most important number in personal finance. It's Sam's net margin: out of every $1 earned, 19¢ is kept.

Fixed vs variable costs

You met this idea in the income statement lesson: rent is a fixed cost for the bakery and for Sam. Fixed costs are paid whatever happens, so they are what makes a budget fragile when income falls. Variable costs can be adjusted month by month.

Fixed costs

45%

Rent, utilities, insurance, loan payments. Cut them rarely, but when you do (a cheaper flat, a better phone plan) you save every month, forever.

Variable costs

36%

Groceries, eating out, fun. Easy to change this month — and just as easy to let creep up without noticing.

How to build your own budget in 4 steps

Find your real take-home pay. Look at what arrived in your bank account in each of the last three months. If it varies (freelance, bonuses, tips), use the lowest month.
Track what you actually spend. Download one to three months of bank and card statements and put every payment in a category. Most people are surprised by at least one line.
Don't forget irregular costs. Car repairs, birthdays, annual subscriptions, the dentist. Add them up for a year and divide by 12: that's a monthly line too.
Write the plan and compare every month. Budget vs actual — exactly what company managers do. Adjust the plan, not your honesty.

⚠️ The "lifestyle creep" trap When income rises, spending quietly rises with it: a nicer flat, a newer phone, more takeaways. A raise only improves your life if part of it goes to the bottom line. A simple rule: save at least half of every pay rise.

A budget is like a company's numbers — the same ratios work

Company	Household	Sam
Revenue	Take-home pay	$3,000
Fixed costs	Rent, bills, loan payments	$1,350
Net income	Money left to save	$580
Net margin	Savings rate	19.3%
Interest coverage	Income ÷ debt payments	20x
Cash on the balance sheet	Emergency fund	Step 1

✏️ Check yourself: Sam gets a $300 monthly raise (after tax) and moves to a flat that costs $250 more. What is the new savings rate?

Show the answer

Income → $3,300. Spending → 2,420 + 250 = $2,670. Left to save → $630, so the savings rate is 630 ÷ 3,300 = 19.1% — slightly lower than before, despite the raise. That's lifestyle creep in one line. Had Sam kept the old flat, savings would be $880, a rate of 26.7%.