The Language of Money
Are we speaking the same language? That’s what I was thinking after a recent budgeting discussion I had with a military spouse. I was trying to provide some spending guidance, but our conversation was hitting a stumbling block.
We were talking about expenses as a percentage of monthly income. For example, if your monthly income is $5,000 and your budget allots 10 percent for transportation expenses (including car payment, gas and maintenance), then you can reasonably spend $500 a month on transportation.
So far, so good. The problem was that I was talking about expenses as a percentage of gross monthly income, but she wanted to look at expenses in the context of net income — what she had to work with after each paycheck was deposited. While that may not seem like a big deal, there’s often a lot happening in between what you make and what you take — some of which could be hurting you financially. It’s important to understand the difference.
Look at your LES
There’s no better place to begin the exploration of gross vs. net income than with your leave and earnings statement. The total at the bottom of the entitlements column on the left side of the form is your gross income. And that’s the amount you should be using to calculate appropriate expenses.
But why? Well, let’s say you use net income instead to figure out how much you can reasonably spend on different outlays such as transportation and mortgage or rent. That net figure is your gross income minus your deductions and allotments — things like income tax withholding, Social Security and Medicare taxes, contributions to the Thrift Savings Plan and Servicemembers Group Life Insurance.
These expenses can vary significantly from one family to another, and if you simply skip over them and use net income as your baseline, it can be difficult to determine if your expenses are reasonable for your income level.
When you calculate expenses as a percentage of gross income, you also get a clearer picture of exactly where all your money goes each month. Who knows, you might even discover that your allotments or deductions aren’t quite right. Maybe you’re withholding too much on your income taxes. If so, then your net income will provide an inaccurate baseline for your budget calculations.
Bonus benefits of looking
A thorough review of your LES will do more than shine light on gross vs. net income. The military has dozens of different special and incentive pays and allowances. Are you getting what you’re supposed to?
A regular look at your LES can also help you catch identity theft or fraud before it does serious damage. Are the deductions on your LES all legitimate and part of your plan? Is your leave reflected accurately? If you find a discrepancy in any area, contact your financial services office.
In the end, no matter what language you’re speaking, the important thing is to have a firm grasp on your day-to-day finances. And if you don’t, your next LES may be a great place to start the process.