Legit Financial Cents: Budgets
Inflows vs Outflows; Surplus vs Deficit
So you’ve made some carefully thought out life decisions and attended college, bought a car, and hot damn, even purchased a starter home. As we learned in a previous article, you now potentially own an interest in a few assets (and more than likely have acquired a few liabilities in the process).
Each month, a portion of those liabilities will require a monetary payment to satisfy those overlords you owe the liability to. If you regularly pay, you stay in the good graces of your credit overlords. If not, what you thought was an asset will be snatched up before you can say Democratic Socialist.
Ideally, if you owe money to the overlords, you have or had good reason to believe you eventually would find a way to generate income to make these regular liability payments.
Income usually takes the form of:
- Cash payments received for your physical labor or intellectual contributions to an enterprise
- Cash payments received for allowing others to temporarily access your non-monetary assets
- Cash payments received from letting others borrow your monetary assets
- Cash payments received because you own a portion of a profitable company
- Cash payments received for appreciation of value on sold assets
- Cash payments received as part of social safety net programs
So add up all of your expected income in any given time period, typically a forward looking month.
Now add up all the amount you’ll have to pay in that particular period, to keep your credit overlords happy. This liability payment figure will most likely only be a portion of your total outstanding liabilities. Remember, these overlords are fine accepting partial payments from you, as their goal is to keep you making payments in perpetuity…never reducing the original amount you borrowed.
Depending on the arrangement you made with the overlords that lent you money, a portion of this payment you fork over is just a fee charged for the privilege of borrowing money, while the rest will go to reduce the total balance that you still owe said overlord. If you aren’t repaying your liabilities fast enough, or not paying enough each time, each future payment you make could easily be allocated simply to that privilege fee, never reducing the amount you originally borrowed, keeping you a credit slave forever.
Now that you have your total expected income figure, subtract the amount you will owe to the overlords in the same period. If the number is positive, you are running a surplus (yay). If the number is negative, you are running a deficit (how American).
With a surplus, you’ll have to decide what you want to do with the unused cash (a new asset)! We’ll discuss that in a future article.
With a deficit, you are living outside of your means, and your liabilities likely will increase at a faster pace than your assets as you borrow more to cover the shortfall. This generally leads to one losing all of their assets to their credit overlords and being forced to start a gofundme page so they can eat.
I write in jest, but this is a very important concept to understand. Spend less money than you bring in.
For more on household budgeting, I strongly recommend you get acquainted with the following books:
How To Save Money Without Really Trying: A Step-by-Step Guide To Saving $1,000 Per Month
Cheers,
Smerc
