Assessing Where You Are Financially: Comparing Spending and Income

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Now comes the real measure of the state of your finances: figuring out how your total spending compares to your total household income. You may be in for a shock. Are you ready?

Gathering the necessary materials

To complete this exercise, you need a pad of paper, a pen or pencil, and a calculator. You also need the following financial information:

• Check registers
• Bank statements
• Receipts for major purchases not made with a credit card
• Credit card account statements
• Other expense records for the past 12 months

You also need records of your income for the past 12 months, such as pay stubs and deposit slips or direct deposit information. If you're self-employed, you need your business records.

Your spouse or partner should gather the same information because the goal of this exercise is to give you as complete a picture as possible of how your household spending compares to your household income.

Categorizing your expenses

Creating a worksheet modeled after the one in Table 1-1 (at the end of this article) will help you organize your spending and income information and make sure that you don't overlook anything.

The worksheet in Table 1-1 divides your spending into three categories:

• Fixed expenses: These expenses stay the same from month to month. Examples are your rent or mortgage, car loan, home equity loan, and insurance.
• Variable expenses: These expenses tend to vary from month to month. Examples are your groceries, gas, utilities, restaurant meals, movies, CDs, and books.
• Periodic expenses: These expenses may be fixed or variable. You pay them just once in a while, such as quarterly, every six months, or annually. Tuition, some kinds of insurance, property taxes, and dues are examples.

Some expenses listed as fixed on the worksheet may actually be periodic expenses for you. For example, instead of paying your auto insurance every month, you may pay it every quarter.

After you've calculated total annual amounts for each of your debts and for all your living expenses, enter them on the appropriate worksheet lines.

Figuring out the fritter factor

It's so easy to fritter money away, isn't it? A latte here, a happy-hour drink or two there, lunch out with friends or colleagues, new clothes. Before you know it, it's the end of the month and you don't have any money left. Where did it all go? Most likely, you unconsciously frittered it away on unnecessary, miscellaneous items. Each purchase may not have cost much, but together over a month's time, frittering adds up to a significant amount. How much?

Let's assume that every workday you spend $3 on a latte. In a month, you spend $60, and in a year that small daily purchase adds up to $720! If you also spend $2.50 per day for a bagel or pastry to go with the latte, you're spending $110 each month and more than $1,300 per year! Scary, huh?

If you're like the vast majority of people, you get paid money much less often than you spend it. You probably get paid every week, every two weeks, or every month " but you spend money every day, don't you? This leads to a distortion in how you think about money and makes frittering all too easy.

To help you get a handle on how much you fritter away, for one month we want you to write down everything you purchase with cash, a debit card, or a credit card. Your spouse or partner should do the same. Carry a small notebook with you whenever you leave the house so you can record every expenditure right away instead of trying to remember it later. When the month is up, add up everything you spent on nonessential items. We bet you'll be shocked to see how much it amounts to. Multiply this number by 12, and put that number in your worksheet under "Other" in the "Variable Spending" section.

Totaling spending and earnings

Add up the numbers in each of the three spending categories in Table 1-1 to get a subtotal for each category. Then add up the subtotals. The final number represents the amount you are currently spending each year.

Next, add up all the income you received during the same 12-month period. Take into account not just your net household income (your take-home pay, which is gross income minus all deductions including taxes), but also any other income you or your spouse or partner may receive: government benefits, investments, royalties, child support or spousal support, income from a family business, and so on. Record that total on your worksheet.

If you are entitled to child support and/or spousal support but the payments rarely come, don't include those amounts when you calculate total annual income for your household. If it's unreliable income, you can't count on it to help cover your spending.

Calculating your financial bottom line

When you have a total annual income amount and a total annual spending amount, subtract your spending total from your income total.

If the final number you calculate is negative, you can probably guess what that means: The amount you are spending is more than your annual household income. You may be financing your lifestyle by using credit cards and cash advances, and/or you may be falling behind on some of your obligations. Furthermore, you may not be paying some of your bills at all, which means that if you add the amount of those bills into your calculations, you have an even bigger deficit.

If you ended up with a positive number, your finances may be in better shape than you think. Or not. If the number is small, you may be just barely staying ahead. And if your bottom line is positive only because you're paying just the minimum due on your credit cards each month or because you've stopped paying some of your debts, you have no cause for celebration. If this describes your situation, you are treading water, at best, and a financial setback such as a job loss or expensive illness could be devastating.

This article was authored by Ted Benna, Stephen R. Bucci, James P. Caher, John M. Caher, N. Brian Caverly, Peter Economy, Jack Hungelmann, John E. Lucas, Sarah Glendon Lyons, Margaret A. Munro, Brenda Watson Newmann, Mary Reed, Jordan S. Simon, Kathleen Sindell, Deborah Taylor-Hough, John Ventura.