Financial trouble can be avoided by making sure you do not spend more money than you take in. It sounds simple, but many people lose the battle of income vs. expenses. The key to coming out ahead is making sure you have a clear view of what’s happening month to month.
Sometimes, financial problems are caused by events beyond your control such as a serious illness, loss of a job or other financial setback. You can avoid many financial problems by tracking your expenses each month and determining where you can reduce spending, if necessary, to make ends meet and stay on firm financial footing. The goal is to cover your expenses and have some money left at the end of each month to build some savings. In the end, what you will have done is created a budget for yourself, reflecting the amount that you can spend each month while meeting your long-term savings goals.
You can track your spending on a monthly budget worksheet written on paper, an electronic spreadsheet or use one of the personal expense tracker apps. This is simple arithmetic. You can do this.
Here is how to track spending:
- Identify Your Monthly Income
Step one is to review your salary and wages and write down your income for one month. This may be the simplest task. For most of us, our monthly income comes via weekly or monthly paychecks that do not vary.Others have multiple sources of income and will need to add up all of them. If you are like many in today’s gig economy and your income fluctuates, average your income over three to six months that you truly feel represent your typical earnings.
- Categorize Your Spending
The frustrating part of tracking expenses and creating a budget is that some expenses are immovable. You can’t just cut back on them this month if you spent too much last month. But in just about every household, there is some discretionary spending to consider.Start by listing your essential expenses: rent or mortgage, car payment, utilities, groceries, college loan payments, insurance premiums, and personal expenses. Go through past or current bills, cancelled checks or bank records to get these figures. Some of these expenses fluctuate, such as groceries and utilities, but the point is that they are recurring each month.The monthly total of your essential expenses subtracted from your monthly income gives you the amount of money you have for discretionary spending each month.
- Record Your Daily Spending
Here we get to the heart of the matter: where the money goes day by day and where you can make changes. You need to keep a record of everything you spend money on and how much you spend every day for a month. Include everything — from morning coffee to afternoon sodas, lunches and dinners out, that treat for yourself or your child at the mall, that impulse order online and gifts. Carry a notebook and a pen with you; this doesn’t work if you don’t get it all.Once you have this total for a month, subtract it from your discretionary income total, which you calculated in No. 2 above. If you come up with a negative number, that’s a problem. Your expenses are more than your income, and you are accumulating debt.If you had no large unexpected costs and you find you are going into debt, you need to take a hard look at where you can cut back.
If you end up with money left over, congratulations; you have stayed within your budget. This creates a cushion for the following month. If you consistently stay within your budget, you will eventually have a nest egg you can put into a savings or investment account.
- Reconcile Your Budget
In the end, tracking your expenses is all about maintaining a budget, or making sure income and spending plus savings even out. In other words, you want to make enough money to cover your essential expenses and allow for some discretionary spending and have some money left to add to your savings, such as for an emergency fund or retirement.One rule of thumb for budgeting is to allow 50 percent of your income for essential expenses, 30 percent for discretionary expenses and 10 percent to 20 percent to be put toward financial goals. There are other models, but if you can’t do something like that, you need to make an adjustment.Unless you can increase your income, you need to make cuts in discretionary spending. It is possible to reduce essential expenses, like mortgage or rent, car payments, utilities, but for the purposes of this article, let’s stick with focusing on discretionary spending.
Because you have your discretionary spending added up right in front of you, you probably see some potential reductions. Investopedia suggests ranking discretionary expenses in order of importance to help decide where to start cutting back. For example, you don’t have to pay $5 to get a cup of coffee.
You’ll likely see expenses that fall between essential and discretionary, particularly subscription costs for video services such as Netflix, Hulu, Cablevision or gym membership. Review these subscription expenses regularly and decide whether you are using them regularly and whether you can live without them. You can consider finding better deals, what you can do for free, such as exercising on your own, or doing with less or without.
You also may see unexpected expenses in a given month such as a car repair or home repair. Having savings, or an emergency fund can bridge the gap between your monthly income and unexpected expenses.
N.C. Bankruptcy Lawyers at Sasser Law Can Help
The North Carolina bankruptcy attorneys at the Sasser Law Firm work with people who are dealing with financial difficulties in Cary, Apex, Raleigh, and throughout the Triangle. Our attorneys are all board-certified specialists in bankruptcy law and can help you take the steps necessary to get back on firm financial footing before bankruptcy becomes a viable option. If you feel overwhelmed by financial problems, contact the Sasser Law Firm today for a free consultation.