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MSE’s Academy of Money
MSE’s Academy of Money

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7 The income side of the budget

There are four issues to be considered in measuring the income side of a budget.

The image is of a jam jar with a label on its side. The word ‘Budget’ is on a label. The jam jar is full of coins and a hand is placing a further coin into it.
Figure 6 ‘Look after the pennies and the pounds will look after themselves’

First, the budget should record income in the relevant time period, such as a month or a year. For most people this will represent their net income (with income tax, NICs and pension contributions taken off). If you have income that hasn’t been taxed, you will need to include tax, NICs and any pension contributions in your expenses when you do the ‘outgoings’ side of the budget.

Next, make sure you include all your sources of income, which could be any or all of: income from paid employment, self-employment, savings and investments, pensions and social security benefits. Any additional income – for example the cash received from selling items – should be recorded under the ‘other’ category.

Next, you need to know when you are getting these different sources of income. For example, a household may receive a combination of weekly benefits and monthly pay. In order to standardise these different frequencies of income for a monthly budget, the technique is to calculate an equivalent annual income first (for example, by multiplying a weekly income by 52) and then estimate a monthly income equivalent by dividing this figure by 12.

Finally, are you budgeting for just you, or for the whole family? If it’s for more than one person, make sure you include any income other members of the household get that they contribute to the family budget.

Activity 2 What is income and what is not?

Timing: Allow approximately 5 minutes for this activity

Sometimes people can confuse income and wealth. The former provides a cash inflow that you can spend. This is what you enter into your budget as income.

Your wealth, often referred to as ‘assets’, has value – perhaps substantial value – but does not provide a flow of cash to spend unless it is sold.

Look at the list below and identify those that are incomes and those that are assets in the form of wealth.

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The key thing when identifying income is whether it comes in the form of cash that you spend. Wealth or assets can produce cash only after they are sold.

From a budgeting viewpoint it is essential to distinguish between regular and virtually certain income – like your monthly pay – and irregular and uncertain sources of income (for example, from selling unwanted possessions online for cash). The latter will be difficult to forecast and may not materialise, for example if you can’t sell an item.