Helping Frustrated Renters Become HAPPY Homeowners

The Subject line on this morning’s post from Rich Dad Academy said “Get Rich? First Know Your Income.”

I said, “Amen.”

Because, my mind went immediately to a concern I have, reflected in at least half the applications I get for rent 2 own. Then it also wandered to the chapter on Budgeting in my book, Money Habits for Success: 33 Actions to Survive and Prosper . . . in an Economy. 

The concern? Many people, perhaps even the majority, don’t know their income! They only know what they bring home every two weeks. That’s a path to somewhere other than Success.

The Rich Dad post went on to discuss the three types of income: earned income, portfolio income and passive income. But that’s a bigger topic than mine today, which focusses strictly earned Income, the kind where you trade time for dollars.

In the “Budgeting” chapter of my book, I took a slightly different approach to budgeting from what you typically get. I started by advocating that you divide your total expenditures into six categories: Payroll Taxes, Savings/Investments, Basic Necessities, Discretionary Expenditures, Paying-it-forward, and Miscellaneous.

What was unique was the first category: Payroll taxes. Most advisors don’t include this category, advising people simply on budgeting their take-home pay.

Quoting directly from the book:

Why do I recommend starting with your gross pay and a separate category for the payroll deductions?

Because your gross money is yours; to ignore this category is far too fatalistic. It assumes that some magic happens behind the scenes that you are neither privy to, nor have any control over. Seeing this category right up front is already a step in your financial education. As you learn more and more about money, you’ll soon realize that it is not magic, it is not fixed, and that you have some control over it. You can start bringing that amount down. You are not sentenced to leave this forever in the control of Big Brother.

So I, for one, believe it is important to be aware of your gross pay, your deductions from gross pay, and then your net pay.

For those, then, who don’t know their “Gross Pay” there are several ways to easily find out. If you are a fulltime, permanent worker on a salary, you should already know what your annual salary is, the amount they promised you when they hired you, and any subsequent adjustments. Certainly, you should have that in writing somewhere.

If you are an hourly worker on a fixed weekly schedule, you simply multiply your hourly rate by the number of hours per week, then by the 52 weeks of the year. If you work 40 hours a week, simply multiply your hourly rate by 2080.

If your schedule is not fixed and the hours vary from pay period to pay period, then you need to average them out over the year.

Or, even simpler (for both salaried and hourly workers): Look at your pay stub! By law, every paycheque is required to show your gross pay, all your deductions from that figure and, finally, your net pay, the amount you take home. Multiply that gross pay by the number of pay periods a year to get your annual income; if you get paid every two weeks, by 26, if every month, by 12. Or look at your T-4 at the end of the year, for an annual figure.

What if you’re self-employed or for some other reason, such as commission pay, it fluctuates. Then your gross personal income is the amount you pay yourself after deducting your business expenses, or line 150 (perhaps followed a few 0’s) on your personal income tax form (T1). (If you haven’t filed your income tax, then you are violating a few of the other 33 actions, and not likely yet on the path to Success.)

So there you have it. There are good reasons to know your gross income, annually and monthly. For one, it is the number that is used to calculate your eligibility for a mortgage.

For another, it is a step on the pathway to success. In identifying the difference between Gross and Net, you can see exactly what Big Brother is collecting from you, in advance of your tax judgement day, and holding, without interest, in the meantime.

Will it irritate you? Hopefully, it will!

And then it will inspire you to learn a little more about how money works, how you can make it work for you instead of against you, how you can reduce those tax expenses, how you can add portfolio and passive income to your earned income, and, ultimately, how you can pick up the pace on your road to success!

At least, that’s how I see it . . .