Do you currently track income and expenses in your budget? If tracking is something you struggle with, this post will teach you exactly how to get started.
Budgeting can be stressful on its own. When you add in tracking income and expenses, it can be overwhelming.
The thing is, the only way you’re going to understand your financial situation is to monitor it. You need to know exactly how much is coming in and going out.
To be honest, I haven’t always been in tune with my finances the way I am now. In the past, I ignored my budget on purpose.
I chose to ignore it because I could never keep up with the amount of money I had left in each category.
There was no way to tell that I was spending too much money on things that I didn’t need because most of the time, there was still money in my bank account.
I couldn’t assess the damage until the end of the month, and at that point, it was too late to make changes in my spending habits.
The light bulb went off for me when I realized that if I wrote down all of my transactions and subtracted them from the budget, I could tell what was going on in real-time.
Since then, I have had a grip on my budget, and I know when I’m headed in the wrong direction before I get there.
If you find yourself avoiding your budget, it’s most likely because you’re overwhelmed and don’t have a clue what is going on.
It’s most likely not as bad as you think. You just need to change your mindset about your budget and start tracking your income and expenses.
The first thing I want to talk about is income. Your income includes any money that you receive throughout the month.
Let’s break down the different types of income before we talk about ways to track your income and expenses.
Gross income is the total amount of money you make before any taxes, or additional withholdings come out.
The amount of your gross income is at the top of your paycheck stub.
Net income is the total amount of money you receive after all taxes and deductions.
Most people call this your take-home pay, and you can find the total a bit further down on your paycheck stub. Look at net income as your monthly cash flow.
Additional income is money that you receive outside of your regular monthly income. Side hustles are a great example of additional income.
You may also have things like child support, a bonus from work, or reimbursements that will fall into this category.
Irregular income simply means that you are paid different amounts or on different days every month.
An example would be someone that is paid based on tips or commission. Their income depends on the number of tips or sales they have received during the pay period.
Irregular pay can vary from month to month or even weekly.
Now that you know the different types of income, let’s talk about expenses. Just like income, there are a few types of expenses.
For this post, we will classify expenses as anything that is not income. Let’s break down the three types of expenses.
Fixed expenses are things that are the same every month.
Expenses like cable, life insurance, and student loan payments tend to be the same amount each month. You can also expect the bill to arrive at the same time each month.
Fixed expenses may change annually, but for the most part, they are “fixed” each month.
Variable expenses are the opposite of fixed expenses. These are expenses that fluctuate month to month.
Things like water and electricity are variable expenses because the bill varies based on monthly usage.
The variable expense category also includes things like gifts, clothing, gas, and charity that vary month to month.
The savings category includes any money that you intentionally save throughout the month.
Savings include things like your emergency fund, savings account, and sinking funds.
It may seem weird that savings are considered an expense, but since you use your income to contribute to your savings, it is an expense.
How to track income and expenses
The reason that you should track your income and expenses is to see exactly how much money you spend each month.
When you create a budget, track every financial transaction. You want to have a clear picture of your finances at all times.
Tracking income and expenses is a two-step process. The first step is to gather your transactions, and the second step is to document them.
Track your income by adding money to your budget categories every time you get paid or receive money from any source.
On payday, enter your income into your budget and add money to the categories that you will use before you receive your next paycheck.
Track your expenses by subtracting money from your budget categories every time you spend money.
Any time you make a purchase, subtract the amount of the purchase from the corresponding category.
You will also track your savings in your budget by adding or subtracting money from your savings categories when you save or spend money from them.
Tracking may be tedious in the beginning, but the more you do it, the easier it becomes.
A few months of tracking will show you how much money you spend regularly. From there, it is easy to create goals and adjust your spending and saving habits to reach them.
Ways to track income and expenses
Here are a few ways to track your income and expenses in your budget.
Feel free to use a combination of these methods to track your expenses. Combining techniques makes it easy to stay on top of your budget.
Save receipts and track later
The first way to track income and expenses is to make your purchases, keep your receipt and track later.
Saving your receipts and tracking later is a pretty reliable method.
There are a few ways to do this. Document your receipts when you get in the car, at night before bed, or every couple of days.
Waiting more than a couple of days to track your receipts starts to get tricky, so I wouldn’t recommend waiting too long.
The advantage or tracking later is setting aside time to work on your budget, either daily or every couple of days.
The disadvantage of this method is the potential to lose receipts.
You also run the risk of becoming overwhelmed with the number of transactions to record and receipts to deal with if you get behind.
For this method to work, you have to create a system and make sure you use it for every receipt.
Use your online bank transactions
The next way to track income and expenses in your budget is to pull your transactions from your bank’s online banking feature.
I use this method to track income and expenses in my budget.
The easiest way to use this method is to log onto your bank account’s website once per day to enter all transactions.
The advantage of this method is you will always see a detailed record of the deposits and withdrawals that have cleared your account.
There are a few disadvantages to this method.
The first one is transactions take a few days to clear the bank. You may overspend your categories while waiting on a transaction from two days ago to clear the bank.
Many banks show pending transactions in their portals now, which makes this less of an issue. Just make sure to pay attention to anything that is pending.
Another disadvantage is the transaction descriptions may not always be clear.
For example, if you make a purchase on Etsy, the transaction on your bank statement won’t be labeled Etsy. It will be labeled based on the name of the merchant or payment gateway.
Unclear descriptions get confusing and can make it challenging to know what the transaction was for to categorize it correctly.
I recommend combining this method with another one to stay on top of your budget.
Use an app to track transactions
Most apps today connect to your bank account, so all you have to do is select the category for the transaction, and the app will do the math for you.
One advantage of this method is that all of your transactions are imported daily, which saves so much time. You select the category for the purchase and move on.
Another advantage is the ability to look at your budget before making a financial decision since your budget will be with you at all times.
The disadvantage of this method is becoming less aware of the money that you’re spending because you don’t have to enter the transactions manually.
Apps become smarter each day, and some of them start to categories your transactions for you based on historical data.
Use an app like YNAB that prompts you to approve each imported transaction.
It took a bit of extra time in the beginning, but now it takes less than five minutes each day to track my income and expenses.
This method is simple and makes money management easy since transactions import automatically.
Adjust your budget
Now that you know how to track income and expenses in your budget, we need to talk about making adjustments.
Budgets are flexible, and the purpose of tracking everything is to bring awareness to your spending habits and stay within your budget.
If you notice that your grocery category is getting low and you still have two weeks before the end of the month, take money from another category like clothing and add it to the grocery category.
You will learn so much by tracking your income and expenses.
For example, you will notice trends in your utility bills at different times of the year. You will also learn how much money you spend on average for gas and food and able to adjust your budget to match.
A lot of people give up on budgets because they don’t recognize these patterns. A budget is not a set it and forget it type of solution to all of your money problems.
You have to work on them and adjust throughout the month to make them work for you.
The bottom line
If you use a budget, you should have a system in place to track your income and expenses.
Tracking is the only way to ensure your budget is working.
The goal is to tailor your budget to make sure you bring in more money than you spend and get better at managing your money.
Create a new budget and track your income and expenses every month.
Stay consistent with tracking, and don’t forget to make adjustments to keep your budget in line with your lifestyle.
Do you currently track your income and expenses in your budget? Let me know in the comments.