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It can be difficult to know if you’re spending more than you earn each month if you’re not necessarily falling behind on any bills or financial responsibilities. But if you’re not tracking your spending, you may not be aware if you’re digging yourself into debt. In fact, 42% of Americans use credit cards to fill in the occasional shortfall in their budget, according to a survey from CompareCards. (Disclosure: LendingTree is the parent company of both CompareCards and MagnifyMoney.)
Knowing if you are spending more than you earn each month requires paying attention to your money and doing some simple math. Here’s how to do it — and figure out if you need to make adjustments to your budget and spending habits.
Getting started: Track your spending
First, you need to figure out where your money has been going.
“Actually getting the data to visualize your finances can be one of the most powerful exercises you can do to begin your journey of cash flow management,” said Dan Andrews, CFP at Well Rounded Success based in Fort Collins, Colo.
But, before you can even do that, you need to decide which tracking method you want to use. There are several strategies for figuring out what you spend your money on, and we’ve listed a few of the most popular ways to track your spending below.
The automated option: Budgeting apps
Budgeting apps make tracking your spending easy because — depending on which app you use — the app may do most of the work for you. Most budgeting apps like Mint, YNAB or EveryDollar link directly to your bank accounts, credit cards and retirement accounts. After you’ve linked all of your accounts, the app will automatically pull in and categorize your transactions.
“The apps are fantastic because they generally pull in 3 months of information, and 3 months of data is generally good to see spending habits,” says Krista Cavalieri, senior adviser at Evolve Capital Financial Planning based in Columbus, Ohio.
Once the app does its job, all you need to do is check in regularly to correct any mistakes in categorizing or add in any cash expenses, if the app allows. The apps generally learn to categorize things properly after you correct them. Budgeting apps also generally allow you to visualize your spending in charts and graphs.
Understandably, budgeting apps aren’t for everybody. If you’re in that camp, you could try tracking all of your spending manually using a spreadsheet or spending journal.
In a spreadsheet, you can simply record what you spent money on and how much you spent. If you want, you can use formulas to make the process easier and to automatically calculate sums, percentages and other parts of your spending habits you’re curious about. Several budgeting templates exist within spreadsheet programs and online to help you get started.
A written spending journal
You can also try keeping a digital or physical spending journal. Every time you spend money, record it by hand in a pocket journal or in a notes application on your phone. At the end of each day or week you can spend time reviewing, categorizing and adding up what you’ve spent.
Check in on your spending challenge regularly to get an idea of where your money went and make adjustments accordingly. For example, it may take 10 to 30 minutes to do a weekly review, so pick a recurring day and time when you know you’ll be free for about half an hour. If you notice during your period check-ins that you are overspending, make some changes then and there to correct yourself, suggested Cavalieri.
Choose the budgeting and check-in method that’s the easiest for you to manage so you can see exactly where your money is going, said Cavalieri. She recommends tracking your expenses for three months to get a good sense of your spending, but recording all your transactions for 30 days will give you a sense of how your regular expenses stack up against your monthly income. A 30-day spending challenge using one of the tracking tactics above will give you the figures you need to answer the question, “Do I spend more than I earn?”
Understand the jargon
Before calculating whether or not you’re spending more than you earn each month, you’ll need to understand the components of the equation.
- Income — Any and all sources of after-tax income coming into your budget. Examples of income would be:
- Salary or hourly wages
- Income from a side gig
- Social Security or disability income
- Cash windfalls like a tax refund or gifted money
- Child support or alimony
- Any other source of money coming to you
- Necessary expenses — Necessary expenses are the basics required in your household budget to keep you functioning and gainfully employed. Fixed expenses are non-negotiables like:
- Rent or mortgage to keep a roof over your head
- Groceries to cook food at home
- For example, your car payment, if having a vehicle is necessary to get yourself and members of your household to their obligations, plus fuel and required maintenance for that vehicle
- Public transit fare
- Health care expenses
- Child care expenses
- Utilities necessary to live or communicate like electricity, gas, water, internet and phone bills
- Any debts owed to the government like child support or alimony payments, tax payments and federal student loan debt. (Exclude credit card debt or collection items, as you will deal with that debt separately.)
When you are tallying up your expenses, take care to account for any recurring quarterly, semiannual or annual payments, too, so they don’t catch you off guard, Andrews said. Those may be things like your vehicle registration or tax payments. You may need to plan to save for those month to month so you will have the money on hand when it comes time to make the payment.
- Everything else — Everything else, sometimes called flexible expenses, is just what it means: Every other thing in your budget that is — technically — optional spending. This would include things like:
- Buying lunch or dining out
- Subscription payments
- Any other line items that don’t fall into the “needs” category in your budget
Now that you understand the important parts of the equation, it’s time to crunch some numbers and get to the answer you’ve been waiting for:
Do the math
- Step 1 – Income: The question you want to answer is: How much do I make, after taxes, each month? Be sure to include all consistent income streams and any additional windfalls you are expecting during the time period. Write down that number.
- Step 2 – Necessary expenses: Write down and add up every expense you have that’s vital to meet your basic needs. (To account for fixed annual, semiannual or quarterly payments, figure out how much you’d need to set aside each month to cover that payment when it’s due.)
- Step 3 — Subtract necessary expenses: Now, subtract your necessary expenses from your income. The equation (so far) should look like:
Income – Necessary Expenses = Amount you have left for flexible expenses.
For example, if your salary (income) is $4,000 a month after taxes, you receive a $1,000 monthly child support payment and your necessary expenses total $3,500, then $5,000-$3,500 = $1,500 left over for flexible spending.
If the number you get is negative, that means your necessary expenses total more than your income and that’s not-so-good news.
“If we are not even making this much per month then we really need to take a look at our life and say what’s our living status,” said Colin Overweg, CFP at Advize Wealth Management based in Grand Rapids, Mich. Look to see if you can increase your income or decrease your expenses. You may be able to pick up a side hustle to increase income or ask for a promotion at work that comes with a raise.
If you realize you can’t cover your fixed expenses, take a look at your standard of living to see where you can cut back, Overweg advised. Consider the following options among other fixed expenses:
- Can you downsize your home?
- Can you switch to a car that won’t cost you as much to own and maintain?
- Can you trim your phone bill by switching plans or carriers?
- Are you spending too much money on groceries?
- Can you lower your insurance premiums somehow?
- Can you negotiate some of your bills down?
- Step 4 – Subtract everything else:
This is where the math can sometimes get a little messy.
Cavalieri said the hardest part about budgeting is figuring out where the expendable income in your budget is going, because all of those little expenses here and there add up. Before you know it, the money’s gone and you may feel like you have no idea what you spent it on. But if you’ve been diligently tracking your spending, as described in the first section of this guide, this part gets a lot easier. It’s important to record our “everything else” expenses so you know you can cover your spending and not reach for that credit card.
Speaking of credit cards, this is the time to address your debt obligations and factor in the minimum payments you are responsible for paying each month in to your budget. Here’s the equation:
For “everything “else,” you may be able to insert the number you got from your 30-day spending challenge.
Ideally, the number you get in the end will be equal to or larger than zero. If it’s negative, you are definitely spending more than you earn each month.
What to do if you spend more than you earn
If you are spending more than you earn, you are likely carrying a credit card balance each month, and it’s growing. You need to trim back your spending, or else you will continue to dig yourself into debt.
“Understand the needs versus wants expenses, and cut out as many “wants” as possible to either get out of debt, or start having your expenses be less than your income,” Andrews said. “You might have to get uncomfortable for a short-term period to get on track.”
He recommended you start saying “no” to a lot of things to start the trim. “No to expensive vacations, no to expensive bars no to expensive gadgets is a start,” said Andrews.
You can try a spending freeze or other challenge aimed at cutting back your unnecessary expenses. A spending freeze challenges you to not buy anything that’s not a necessary expense for a period of time. You can do a less-inclusive version of a spending freeze and limit yourself to not spending any money at your favorite retailer, or commit to making coffee at home or in the office instead of visiting a coffee shop.
Challenge yourself to adjust your spending
Now that you know where your money is going, you may realize you need to reroute it. There are several tactics you can use to change the way you spend. In addition to using one of the tracking methods mentioned earlier (an app, spreadsheet or spending journal), try one of these exercises:
Look at what you spent money on and think about why you made that purchase.
“It does benefit a person to bring awareness to spending habits by understanding the psychology of impulse buying,” said Andrews.
Or, you could take a different approach: Before looking at the numbers, guess how much you’ve spent.
“Track what you think you are spending versus what you are actually spending, and check in with yourself at least once a week to see how it’s going,” Cavalieri suggested. The exercise could serve as a much-needed reality check before your spending gets out of control.
Andrews suggested that those who are prone to making impulsive purchases try using a money mantra — a short phrase that can help you ground yourself at the checkout line. For example, you could make it a habit to ask yourself, “Do I really need this?” before you swipe your card.
An accountability partner
Try asking a friend or professional financial planner to join you in tracking your spending habits. Andrews said this tactic may work best for people who are looking for a different perspective on their habits and don’t have an emotional connection to the way the person is spending money. He suggested that those who need a professional choose a fee-only, fiduciary, certified financial planner.
30-day cash diet with a spending journal
Try using cash instead of a debit or credit card for a while. The cash will be a physical reminder of your budget. Take out exactly what you need for a certain spending category, and you’ll be forced to spend within that limit.
What to do if you spend less than you earn but are in debt
If you have room in your budget after accounting for all of your expenses but have debt, you should plan to aggressively address your debt with the money you have left over.
Two common methods used to get out of debt are the debt snowball and debt avalanche. The method you choose will depend on your personality type and what will best motivate you to kill off your debts. Click here to view our Snowball vs. Avalanche calculator.
The debt snowball orders your debts from lowest balance to highest. You will then throw all of the money you can at the debt with the lowest balance first and keep making minimum payments on all of the other debts. The snowball method may help those who will feel more motivated by quickly paying off smaller debts before tackling the larger ones.
The debt avalanche works by listing and paying off your debts in order of highest to lowest interest rate. This method saves borrowers the most money in future interest payments, but may not be the most motivational if the debt with the highest interest rate is also a large debt that will take the a long time to eliminate.
What to do if you spend less than you earn and are not in debt
If you realize you have wiggle room in your budget and don’t have any debt, the experts suggest you funnel your extra funds into savings and investments.
This is the time to think of your future goals. Are you planning to buy a home? Do you want to start a college savings fund for your child? Would you like to travel or go on vacation soon?
The money left over in your budget can be put toward these savings goals. In addition, you could simply put even more money away for your nest egg. If you are behind in saving for retirement, Overweg suggested you send any leftover income into tax-advantaged retirement plans.