Is it In Your Budget? – For Those Whose Spendings Are Outgrowing Earnings

Spending more money than you make is a dangerous habit. It means that you are not saving anything for the future, or even an emergency.

You are also potentially eating into your existing savings or regularly hitting your credit card limit, leading to an endless cycle of debt.

Of course, how much of your income you should spend versus save or invest depends on your lifestyle and financial goals. However, it is easy to feel overwhelmed with so much going on every day, and losing track of your spending is common.

Here are six signs to assess whether your spending is outgrowing your earnings:

1. Your Budget Is Based on Your Pre-Tax Income

If you have based your budget on your annual income or salary, you are making a mistake. A budget based on your pre-tax income is likely to exceed your earnings because you didn’t account for the large chunk going to the government coffer.

Instead, use an online calculator to find your take-home pay and accordingly prepare your budget.

2. Your Expenditure Is More Than Your Income

The basic mantra of financial planning is having more money than what’s going out. But is that true in your case?

Do some Math by jotting down and adding all of your monthly fixed and variable expenses, including your magazine subscriptions and gym memberships, to check whether this sum exceeds your monthly income. If it does, it is time to trim down your expenses lest you end up in debt.

If you are a freelancer or contractor, take the average of your income for the past 12 months to get an approximate idea of your monthly income to make this calculation.

3. There’s an Unpaid Balance on Your Credit Card

Using your credit card for all your purchases is common. However, it is only worthwhile if you can pay off the balance in full every month.

If you are only paying off the minimum amount each month, the remaining balance will start accruing interest and plunge you into massive debts unless you take action now.

4. You Are Trying to Live Someone Else’s Life

If you are trying to ‘keep up with the Joneses’, you are making a big mistake. Trying to live your neighbors’ or friends’ lifestyle or purchasing items to impress people is an unending abyss where you are throwing away your money for no good.

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Every family has different needs and wants, as well as financial goals, and it is imperative that your expenditure and budget are tailored to your unique situation.

5. High Debt-to-Income Ratio

Your debt-to-income ratio refers to the percentage of your pre-tax income that is applied towards servicing your debts. As a thumb rule, you should avoid spending more than 36-40% of your pre-tax income in mortgage repayments, credit card  bill payments, and other debt repayments.

6. You Don’t Have Any Savings

Building an emergency fund and saving for your retirement should be your top budgeting goals. However, if you think you are not making enough to save any money, it is time you revisit your expenditure and take a hard look at where your money is going.

If you cannot figure out where to cut back, it is worth meeting a financial planner to prepare a budget geared towards your long and short-term goals.

Track Your Finances for the Real Picture

Take the first step towards smart money management by tracking all your expenses. While this may sound painful or boring, it’s not as difficult as it sounds to keep a tab on where your money is flowing.

Here are some tips for tracking your expenditure accurately:

1. Check Your Account Statements

Download your account statement each month to identify where you are spending. If you use your credit card for payments, you can do the same with your credit card statement to see where and how you are spending.

2. Categorize Your Expenditure

Some credit cards automatically tag your purchases under separate heads so that you can identify your spending patterns. These are some of the credit cards for millennials and make the process easier

If you don’t have this facility, you can always do such a categorization manually to discover small items that are sneakily adding to your expenses. It could be the gym membership you don’t need or other recurring services you no longer use.

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We recommend dividing your expenses into clear heads like food, liquor, entertainment, transportation, utilities, shelter, and other such heads based on your lifestyle for a clearer picture of your finances.

3. Use a Money Tracking App

If you don’t wish to crunch the numbers manually, there are money tracking apps that will categorize your expenses to give you detailed reports at the end of the month.

Some banks will also give you a detailed breakdown of your expenses in your monthly statement. You can also set limits in your budgeting app to get notified if you spend extra in any category.

Once you start tracking your money, it will help you uncover patterns in your spending to figure out what’s really costing you. Based on your observation, you can pick out the bigger fixed expenses that impact your budget significantly and make positive changes to bring these payments down.

Fitting Your Expenses Into Your Budget

If you can’t grow your income to accommodate your expenses, you need to cut back on your spending to align it with your income. Here are some tips for living below your means:

  1. Plan a Budget

Having a plan for your money can be empowering. For starters, you can allocate up to 50% of your income to household expenses, 30% for savings and investments, and 20% for your debts.

Once this is done, you may put your utility and debt payments on autopilot only to keep the expendable amount in your account to minimize the urge to spend.

  1. Pay Yourself First

Paying yourself before anybody else means directing a fixed portion of your income towards your savings and investments before you start spending on your needs and wants.

You can always meet a financial planner or compare financial products online to stash your money in a high-interest rate savings account and identify short and long-term investment schemes tailored to your financial goals.

  1. Cut Down on Frivolous Expenses

A fool and his money are parted pretty soon. Don’t be a fool when it comes to your hard-earned money by learning to differentiate between your needs and wants and budget your expenses accordingly.

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Generally, it is the big-ticket items like your mortgage and other loans that tend to eat up the majority of your income. However, even small expenses like eating out every day and unnecessary subscriptions can add up to a lot over time.

It is ideal to go through your budget with a fine comb to identify such expenses so that you can optimize your spending.

  1. Refinance Your Mortgage

As we said above, your mortgage and other loans take up a majority of your income. If you have a set and forget attitude when it comes to your loans, it’s time to change that and actively scan the market for better deals and offers that can save you thousands of bucks over time.

This also applies to utilities like your mobile and internet plans and insurance premiums. With so much competition, service providers are continually updating their offers and rates, and you may find a better offer to save more money on necessities every single month.

Experts also suggest right-sizing your purchases like your home or drive. Often, you may be able to borrow a substantial amount but sustaining a big-ticket loan for the next 30 years is not easy.

Instead, it is better to right-size your home by buying something smaller and more affordable so that you can enjoy your home without feeling stretched for additional costs like tax, ongoing maintenance, etc.

In Closing

It’s okay to feel overwhelmed about tracking and managing your money, but small steps lead to big wins, which holds for your finances as well.

Start small by pulling out your monthly account statements to categorize your expenses and identify items that are draining your income and those that don’t look as bad as you had imagined.

By comparing these with your budget, you will also be able to pinpoint expenses that had not been accounted for previously to create a more realistic picture of your finances.