Getting a good grasp on your finances boils down to a healthy income-expenses balance. If you spend more than you make or have saved, then you’ll probably find yourself spiraling deeper and deeper into debt. The best way to get out of the cycle of debt is to learn how to balance your income and expenses. This article will give you the three basic pillars of balancing your income and expenses to get you on the way to avoiding – or getting out of – debt.
1. Take Stock of your Income and Expenses
No matter your financial situation, if you are looking to improve your finances, the first place to start is to list out your current income and expenses and see where you stand. Do this without judgment or shame: You simply want to know where you are so you can decide where to go next.
At the most basic level, balancing can be boiled down to your income (how much money you bring in) versus your expenses (how much you spend). List out all sources of your income in one column and your monthly expenses in another. Remember to take into account all sources of money (your job, your side hustles, money from family, etc.) as well as all of your expenses (steady, monthly expenses as well as annual ones that should be divided by twelve to figure out how much you spend monthly).
If you find this task daunting, give yourself an entire month to record it and jot it down as you go. As you both earn income and spend, log the numbers in your notebook or excel spreadsheet. If you take just a few minutes a day to do this tracking, at the end of the month you should have a complete picture of your income and expenses.
Next, you can move on to determining whether you need to make any changes in order to balance your income and expenses to avoid debt.
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2. Create a Budget
Once you’ve set forth your income and expenses, you are ready to put together a monthly budget. Using the numbers from step one, allocate a portion of your income to each of your expenses. There will be some fixed expenses (such as your rent or mortgage payment) that are easy to allocate since you know the monthly figure. For other categories, such as dining out or groceries, decide how much money you can afford to spend on that category monthly. As you are creating this budget, decide where you’ve spent too much in the past (perhaps on clothing or dining out) and allocate a lesser amount going forward.
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3. Cut Back if your Expenses are Greater than your Income
What do you do if, after you’ve assessed your income and expenses and created a monthly budget for yourself based on those figures, your expenses are greater than your income? You need to figure out ways to make up the difference.
One way to do this is to go back through your budget and cut back even more on some expenses. A second option is to figure out how to increase your income. Could you get a part-time job (even temporarily) or sell some high-value items you no longer use?
If you are unable to balance your budget after cutting back on expenses and finding new sources of income, and you have existing debt you are struggling to pay off, consider reaching out to a debt relief company to guide you moving forward.