Gross pay is your salary, the total dollar amount your employer agrees to pay you over a given time period. Net pay is your “take-home pay”: the amount you earn after your employer makes any deductions for taxes or employee benefit programs. Common deductions include federal and state income taxes, Social Security taxes and the cost of employee-benefit programs like health insurance. In essence, your net pay is the money you have to live on. It’s the money you have to cover necessary expenses – food, housing and savings – and, after that, any “discretionary” purchases like cable TV or movie tickets. In general, net pay is approximately 60 percent to 70 percent of gross pay. So, for example, while you may make a salary of $50,000 a year, you may only get $30,000 a year to live on.

Having an emergency savings fund to draw on in the event of some unforeseen financial setback, such as a medical emergency or job layoff, is critical, particularly in uncertain economic times. In case you suddenly find yourself without a steady paycheck you will want a source of cash to tap for living expenses so you aren’t forced to rely on a credit card and fall (or go deeper) into debt. You should aim to build an emergency fund equal to approximately the amount of three months to six months of living expenses. So if rent, food, utilities and transportation costs you roughly $2,500 a month, strive to build an emergency fund between $7,500 and $15,000. If you aren’t currently earning a salary because you are starting a business, you’ll need even more. Aim for 12 months to 18 months of living expenses or, roughly, between $30,000 and $45,000, in this example.

When you take out a loan, you should know that you will owe your lender the initial amount of money you borrowed – the principal – as well as compensation for lending you the money, which is called interest. The interest rate is the percentage of the principal you owe for borrowing over a certain time period, usually a year. Interest payments are calculated with either simple interest, which is a flat percentage of the principal, or compound interest, which is a percentage of the initial principal plus the interest payments that have already accumulated over time. If you miss a loan payment, your lender will charge you a late fee and the interest rate could increase. What you ultimately owe will not only be more than you borrowed but it will be more than you originally agreed to pay to borrow. A missed payment can also adversely affect your long-term ability to borrow. 

People have different tastes and aptitudes when it comes to tracking spending. Some like to use computer programs like Quicken or a spreadsheet that they develop themselves. Others like old-fashioned pencil and paper. Still others use a combination of methods. Choose a method that you are comfortable with and that you will actually use. Tracking your spending consistently is vital, but the best method is what works for you.