Comparing your spending to your income

Managing your finances can be complicated. But, comparing your spending to your income is a key step to stability. By understanding how much you earn and where your money goes, you can make informed decisions, create a balanced budget, and save for future goals.

Why comparing your spending to your income matters

Knowing how your spending compares to your income is key to avoiding debt, reducing stress, and achieving financial security Here are a few reasons why this comparison is crucial.

Financial awareness

It helps you understand your spending habits and recognise where you might need to cut back.

Budget planning

By comparing income and expenses, you can create a realistic budget that prevents overspending.

Savings and investments

When you know where your money is going, you can allocate funds to savings and investments, securing your financial future.

How to track your income  

Tracking your income is the first step in comparing it to your expenses. By understanding how much money you bring in each month, you can set realistic financial goals and manage your spending. Here are practical steps to help you track your income effectively.

1. Monthly Pay Cheques:

Start by recording all sources of earned income. This includes:

• Salaries: Note your net income after tax and all deductions. This is often the largest source of monthly income.

• Bonuses: Note if your job provides periodic bonuses, include these in your monthly calculations. Spread them out evenly if they are infrequent.

• Freelance work: For those with side gigs or freelance jobs, track the earnings from each project or client. Sum them up to get your total monthly freelance income.

2. Passive income:

Apart from your primary income, include any additional sources of revenue:

• Rental income: If you own rental properties, add the monthly earnings after expenses.

• Dividends: Record dividends from stocks or mutual funds. If these are reinvested automatically, note them separately to keep track.

• Passive income streams: Consider factoring in other sources like royalties, affiliate marketing, or interest from savings accounts as additional streams of passive income.

3. Total income:

Once you've listed all your income streams, sum them up to get your total monthly income. This will give you a clear view of how much you have available for expenses, savings, and investments.

Tips for tracking your income 

Use tools

Consider using apps or software to automate and simplify income tracking. These can sync with your bank accounts and categorise your earnings.

Stay consistent

Make it a habit to track your income regularly. Monthly reviews can help you spot changes or fluctuations. Set a date and time in your calendar and ensure it repeats monthly so you don’t forget.

Annual averages

If your income varies month-to-month, calculate an annual average to get a more stable figure for budgeting.

How to identify your expenses 

Now that you know your income, it's time to identify your expenses. Categorising your spending can simplify this process, making it easier to create a budget, analyse your financial habits, and make necessary adjustments. Here's a detailed breakdown. 

1. Fixed Costs

Fixed costs are regular, predictable expenses that occur on a monthly basis. They are often contractual or necessary for basic needs, including:

• Rent or mortgage: This is likely one of the largest fixed expenses. If you have a mortgage, account for principal and interest payments, as well as escrow for taxes and insurance.

• Utilities: These include electricity, water, gas, internet, and other essential services. While they may fluctuate slightly, they are usually consistent enough to be considered fixed.

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• Insurance: Monthly premiums for health, car, home, or renters insurance fall into this category. Ensure to account for any potential adjustments during policy renewals.

2. Variable costs

Variable costs are flexible expenses that can change from month to month, allowing room for adjustments based on your financial situation. Key areas include:

• Groceries: Track your spending at supermarkets and markets. Monitoring this can reveal if you're overspending and allow for adjustments.

• Dining out: Restaurants, cafes, and take-out meals fall here. This is an area where many can save significantly by cooking at home more often.

• Entertainment: Subscriptions to streaming services, movie tickets, outings, or other leisure activities fit into this category. It's important to monitor these closely to prevent overspending.

3. Unexpected Costs:

Unexpected costs are expenses that arise unexpectedly and are not accounted for in the regular budget. Examples include:

• Emergency repairs: Home or car repairs can be costly and inconvenient. Consider setting aside an emergency fund to cover these unforeseen expenses.

• Medical bills: Even with insurance, unexpected medical expenses can occur. This includes copays, prescriptions, or treatments not covered by insurance.

• Miscellaneous costs: Unplanned events such as travel emergencies, gifts, or other unforeseen expenditures should also be factored in.

Tracking and Managing Expenses

• Use a budget: Once you've categorised your expenses, compare them to your income. This helps to create a balanced budget, ensuring you're not spending more than you earn.

• Adjust: If you find yourself overspending, identify areas to cut back, particularly in the variable costs category.

• Regular reviews: Periodically review your expenses to ensure they remain balanced. This will help you identify patterns and make adjustments as necessary.

Comparing your income to your spending

By understanding where your money comes from and how it is spent, you can make informed decisions, create a balanced budget, and plan for future goals. How do you start? Well, now that you know how much  your income is  and what your typical expenses are, it’s time to compare and see where the difference is. 

Calculate the difference

Subtract your total expenses from your total income to get a surplus or deficit. A surplus indicates that you're earning more than you're spending, allowing room for savings and investments. A deficit, on the other hand, means you're overspending and may need to make adjustments.

Analyse

After comparing your income to your spending, take a closer look at the trends:

• Spending patterns: Are there specific areas where you're consistently overspending? Identifying these can help you make targeted changes.

• Income fluctuations: If your income varies, take note of this when planning your budget. Consider an annual average or look for ways to stabilise your earnings.

• Make adjustments: If you find areas where you can save, implement changes gradually. This could include cutting back on variable costs, negotiating bills, or increasing your income through additional revenue streams.

How DebtBusters can help you with your financial planning

Beyond debt solutions, DebtBusters provides guidance on budgeting and financial planning. Our advisors can help you to create a balanced budget where we identify areas where you can cut back and reallocate funds to pay down debt more quickly.

We can assist with setting financial goals and establish realistic goals for managing debt, saving, and investing, leading to long-term financial stability.