Understanding income, expenses, and savings
Understanding Income, Expenses, and Savings
It’s important to have a clear understanding of your income, expenses, and how to prioritize savings.
Types of income: Identify and categorize your various sources of income, such as your salary, freelance work, investments, or any other income streams. Understanding your income sources helps you plan and allocate funds effectively.
Essential vs. discretionary expenses: Differentiate between essential expenses (e.g., housing, utilities, groceries) and discretionary expenses (e.g., entertainment, dining out). Prioritize your essential expenses and allocate a portion of your income towards discretionary spending, while ensuring you can meet your savings goals.
Emergency fund: Building an emergency fund is crucial. Aim to save three to six months’ worth of living expenses to provide a safety net in case of unexpected events like job loss or medical emergencies.
Savings and investments: Allocate a portion of your income towards long-term savings and investments. Explore options like retirement accounts, index funds (a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index), or other investment vehicles that align with your goals and risk tolerance.