I often capitalize three specific words when talking about personal finance: Income, Bills, and Expenses.
I’ve defined these ideas in different posts throughout the history of this site, but I’ve found that I haven’t actually devoted a place to just those definitions. And since I’ve learned that I define these terms slightly differently than other places out there, this post will be a reference that you and I can return to, to understand why.
If you want to bookmark a post, this would be one to bookmark!
Income refers to all money that you receive.
This most obviously refers to things like wages and pay checks, but can include other payments as well. Here are some other ideas:
- Tax refunds or other reimbursements
- Proceeds from selling things (such as on eBay or Craigslist)
- Money that someone is paying you back
If it’s liquid assets (as in, not property or other tangible things), then it goes in this category.
Bills refer to every regular or semi-regular payment made.
A regular payment is one that is the same amount at the same time each month. The canonical example for this is rent/mortgage payment. Also, the phone is a good one. And car insurance. If you give money to a charity, that goes here too.
Then there are the payments that happen at the same time each month, but differ in amount. This would be things like utility payments, or credit card payments.
I would also consider putting money away in savings/retirement a Bill, under the heading of that venerable mantra “paying yourself first“.
Bills can happen more than once per month too, or even once every other month. (For example, property tax that goes out once per quarter is still a Bill.) In all cases they still are mostly regular and scheduled. These are the payments that are easiest to automate.
Expenses refer to every non-regular purchase made.
This is the stuff that you do every day (or at least often) throughout the month. Things like groceries, restaurants, home supplies, pet food, gasoline, and clothing. And of course, all those little things that don’t quite fit into any category.
While I see the difference between Bills and Expenses being very important, I don’t usually see people splitting them up as intently as I do. Because of this, it may sometimes be difficult to know whether something counts as a Bill or an Expense.
So here’s a trick that I’d use: If you would use the word “payment” to describe it, it’s a Bill, while if you would use the term “purchase” to describe it, it’s an Expense.
For example, you would purchase gas, but you would make a payment on you car insurance. You wouldn’t make a payment to the restaurant; you would purchase food. But you wouldn’t purchase rent; you would make a rent payment. See how it works?
Add it up
The equation to remember is:
Income = Bills + Expenses
What this means is that, for everything that comes in (Income), you must make sure it’s equal to the sum of all your Bills and Expenses. Everything must add up, and you must figure out how to do this.
If you can make this equivalence work for you, month in and month out, you are positioned for success. And success, in this case, means control over financial situation, understanding and focus to your habits, and eventual wealth. Not bad.
Did I miss anything in these categories? Let me know and I’ll update this post.