Why You Earn 90 Percent Less than What You Think

by JT McGee

If I were to make $10,000 per month (I don’t), I would earn $120,000 a year, right?

Wrong!

I’d probably make half, a fifth, maybe even a tenth of that! This kind of thinking is the kind of thinking that leaves people broke…and quickly.

Making an Income Statement

The best thing you can do is start tracking your income as if you were a business. You have revenues, sales, or an income— whatever you want to call it. Then you have expenses; your mortgage, transportation, food, utilities, the cable bill, etc.

A basic income statement works best. At the top of a sheet of paper, write your income. Below that number, do your best to come up with each of your fixed expenses, such as cable, internet, phone, rent/mortgage, etc. Follow these fixed expenses with those that vary, and to error on the side of accuracy, I’d estimate my variable expenses–food, transportation and fuel, utilities–then add 10%, just for good measure. You can fit this on a Post-It Note.

It’s About Perspective

So why does it matter that I track my income as my earnings – expenses, and not just my earnings? I really earn a salary of $xx,xxx!

It matters for one very simple reason: how you value your money. After making an income statement I imagine that most people realize that after all their expenses they really don’t make that much money.

That $10 weekday lunch? “Pfft, that’s nothing, I make $60,000 a year!” No, you receive a salary of $60,000 per year, $5,000 per month, but that doesn’t mean you earn $5,000 per month. You may actually earn only $500 per month.

The difference between the two is actually pretty big:

Here’s $10 compared to $500:

Here’s $10 compared to $5,000:

Ouch!

Why it Matters

Even if you have no idea where your money goes, chances are good that you spend more when you “feel” rich and spend less when you “feel” poorer. If you consistently remind yourself how much you’re actually earning–the amount after all expenses and mandatory savings–then all those little (and so easily justifiable) purchases start feeling like punches, rather than pinches.

If we’re looking to save, then punches are a good thing. 😛

{ 9 comments… read them below or add one }

Roy January 27, 2011 at 12:31

Excellent point JT and I think it’s something most people do not consider.
I too see income as only as revenue. What’s important is how much profit you are making.

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Everyday Tips January 27, 2011 at 14:02

I really enjoy the visual. Taking some lunch money from the little square is much, much different from just taking it from that giant square! That is a very interesting way to think about it, and also very true.

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Car Negotiation Coach January 27, 2011 at 14:16

And then $10/day quickly turns into $2600 a year!

I’m always shocked by folks that don’t realize how much they are actually paying for cable on an annual basis. They sign up for all the premium channels and not counting phone/Internet, pay $110/mo, which is ends up being $1320 a year! Counting phone/Internet is double that.

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JT McGee January 27, 2011 at 14:22

@EverydayTips – It is insane how much of a difference you have when you look at earnings vs revenue. It makes even justifying small purchases really, really difficult.

@CNC – Yep. Cable is a great example. A lot of companies are upping their prices in order to cover up subscriber loss. I have a feeling that they’d have a lot less subscribers if they’d tell their customers that rates were going up $60-120 per year instead of $5-10 a month.

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Evan January 27, 2011 at 15:54

That is a really cool way to track your income publically. If you say you net out 5K no one has to know when you are netting 10K if you are making X much more or spending Y less

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Buck Inspire January 28, 2011 at 03:06

Great points. Only recently am I grasping how much I spend on gas! Having a better idea of your entire financial picture actually helps you save in the end. 🙂

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Anne Sales | Coupon Codes January 28, 2011 at 03:51

This post is commendable! I used to keep track of my expenses but I got it in the wrong angle. I just wanted to know how much money I have left. I didn’t have a good concept of why I wanted to keep tract. I have just lost my job and ended up with just a couple hundred in my account. Now 14 months of working and I didn’t save anything. It’s like I wasted all that time because I don’t have anything invested. Anyway, I like your article and the concept you brought up. From now I’d like to be smarter money-wise.

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Will @ HackingTheBank.com January 29, 2011 at 08:41

This reminds me of the calculation in Your Money or Your Life, where you calculate your real working wage. I think combining that calculation with this one makes it very difficult to spend your money, haha. Somehow I still find a way to spend quite a lot of it though.

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Barb Friedberg February 6, 2011 at 20:22

After spending the last 2 weeks titrating our family budget for the year, I couldn’t agree more. Perspective has incredible power. Better create feeling of “less wealthy” to create mentality of saving!

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