Sunday, July 15, 2012

Income Analysis 2012 YTD

There are always two sides to the financial health equation.  The past couple weeks I have been taking a closer look at the expense side of things, analyzing how much I spend on food, transportation, and bills this year compared to last year.  Why do we automatically think that budgeting means controlling our spending?  There is the income side that you need to look at as well.  The thing is that controlling expenses is relatively easy while increasing your income can be difficult to do, at least in the short-term.  However, arguably there is much more potential to improve your financial health by increasing your income.

I've attached a chart showing my year-to-date income, similar to my year-to-date expenses chart.  Unfortunately, it looks like some large key purchases put my 2012 expenses a couple steps above by 2011 expenses while my 2012 income just tracks or even falls under my 2011 income until the jump in June.  Like my expenses break-down, I also break down my income into Income (which is what I classify as work income), Lab Income (I participate in frequent research studies), and Div/Int Income (income from dividends and interest).  First, let's take a look at my work income.

Funny enough, I actually was really confused as to why my income for the first three months and May was lower this year than last year.  I actually finished a part-time job in December of 2011 so the gap between last year's income and this year's income is mostly due to the loss of income from that job.  The reason for the spike in April is a tax refund I received after filing my taxes for 2011.  Since I didn't have much reason to file last year, there isn't that spike in 2011 but I would expect this to be a seasonal effect.  If I am able to plan correctly, however, I should be able to avoid getting a tax refund by having the minimal amount withdrawn from my paychecks by declaring a correct number of allowances on my W4.  If not for my tax refund, I would have seen a larger gap to the downside in this year's income compared to last year.  And the large jump in June is mainly from working more for my summer internship.  I put in a lot more hours and part of my pay is front-loaded with a housing stipend to offset some of my summer housing costs.

You can easily see that Work Income can be very variable as a college student.  When working full-time, however, I would expect to see year over year increases in general and perhaps some (hopefully very few) steep cliffs if I lose my job or something similar.  Obviously the summer spike would also disappear since I'll be working year-round rather than part-time during the school year and full-time during the summer.  Next, let's take a quick look at Lab Income.

The reason why I split Lab Income from Income is that it is can add up to a substantial percent of my overall income but I don't expect to earn much in that category after graduating college.  This chart isn't extremely interesting since the money I get from those behavioral labs is fairly consistent.  I sign up for as many as I can and a lot of the variation just depends on when the labs are available and whether the ones I manage to sign up for have a bonus or not.  And you can see the trough during the summer months when I am not on campus to do those experiments.  Finally, let's take a look at my Div/Int Income.

Div/Int can also be just passive income.  This is the money that my money makes rather than what I earn from my own blood, sweat and tears.  Hopefully, this chart would show increases every year if I am able to budget correctly and keep my income greater than my expenses.  This is because if I generate enough net income that goes into my savings and investments, I would expect a greater amount of interest to be paid on that greater principal.

The huge spike in June is just due to a dividend that my ETFs pay at the half-year mark.  One thing I don't include in my budgeting is capital gains/losses.  I personally think it is a bit controversial whether this falls under active or passive income since you decide how much gain or loss you want to take.  However, for some people it can be a substantial percentage of your income.

Again, budgeting can help you identify a lot of interesting trends in your income and expenses.  You should be able to explain all the weird bumps and twists if given a chart of your own income and expenses.  Being aware of how you are doing financially is generally the first step towards developing better financial health, but it takes some time to build the data to develop that awareness.

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