Spending Wizard

“Do I spend more than I earn each month?”

A lot of people don’t know the answer to this question. Why? Because there’s a big difference between how much you spend each month and how much you pay in bills. Every month your paycheck goes to two primary categories: fixed expenses and unfixed ones. A fixed expense is a predictably recurring bill like your rent, utility bill, TV streaming, student loans and minimum credit card payments. Unfixed are expenses like grocery shopping, gas and online shopping.

Obviously, loans and credit cards help spread out larger purchases into manageable bites, but it’s often difficult to picture how one big credit card bill really impacts your financial life. The illustration below demonstrates how credit cards are fixed expenses that go up over time. Worse, these often include interest payments, which can also make it difficult to eliminate the debt. As long as these payments stick around, they’re essentially a type of pay cut.

Getting a handle on how much you truly spend versus how much you earn is paramount to taking control of your debt. To figure out how much you spend each month, start with what you know. Your bank and credit card statements are your friend while figuring out your spending. Downloading a budgeting app can also help keep your typical spending under control and even track how your spending is shaping up based on monthly targets you set.

Download Spreadsheet

Interactive Wizard

Your Spending Budget

This worksheet will help determine everything you spend money on, so you can make powerful decisions over your debt and maximize the potential benefits of this guide.

Select to Start Spending Budget

Step 1: Monthly Take-Home Pay

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Step 2: Monthly Non-Debt Fixed Payments

These are recurring expenses that happen every month like clockwork but aren’t debt. We’ll handle debt and credit card payments separately. Leave fields that don’t apply blank.

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Step 3: Monthly Fixed Debt Payments

These are all recurring debt payments that appear on your credit report except credit cards and personal loans (see below). Leave fields that don’t apply blank.

Usable Income

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Income minus fixed expenses

Step 4: Credit Card Monthly Minimum Payments

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Step 5: Monthly Variable Expenses

These expenses can change month to month. Obviously, these are the hardest to estimate. Try to find what you have spent or will likely spend in a year and average them out by month, including vacations and holiday expenses. Looking at a few credit card or bank statements can help a lot.

Disposable income

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Income minus all expenses

Disposable income is the money you have left over after you cover necessary living expenses, such as food, shelter, transportation and healthcare. As obvious as that may seem, how much of it you actually have may not be so clear. Ultimately, it’s vital to know — or, at least, guestimate — that amount, because you can use it to pay off your debt faster and make informed financial decisions. This worksheet should give you a good idea where you land.

If you have little to no disposable income, you have two primary options.

The first option is to increase your income. You don’t necessarily need a different job, but side gigs can help, such as ride hailing or picking up food service or grocery shifts. Your life situation may limit this option, but if you’re able, it can be a good way to get you back on track and add some financial stability to your life.

Another option is to cut back on spending where possible. If you know there are areas in which you splurge, you may want to dial them back for a while so you can move ahead. Here are some common techniques to reduce spending easily:

• Audit your subscriptions and determine if you can pare back on magazines, music services and media accounts, such as Netflix. Look into splitting the cost with friends or find free alternatives. If you don’t, cancel them — this is cash that can go straight to ending debt.
• Instead of grocery shopping when you’re hungry, plan your meals ahead of time. That way, you’ll buy ingredients you can use again and again so less goes to waste. Use leftovers or meal prep for lunch instead of dining out.
• Make use of loyalty cards and coupons. Sign up for rewards programs at stores you visit frequently and check out coupon apps, such as SavingStar.

One of the most important considerations when making adjustments to your finances is to figure out how to make the minimum payments at least. If you don’t have or can’t earn enough cash (cash flow) to make that happen, it will be difficult to find a repayment strategy that doesn’t involve some form of debt forgiveness, which can impact your credit score negatively.

Debt Wizard

“How much debt do I have, and is it too much?”

This one’s a biggie, so we’ll address it by looking at two ways to measure debt: debt burden and total debt. Let’s look at them one at a time.

Debt Burden: How much of your paycheck goes to debt

If you’ve ever bought a house, you may be familiar with your debt-to-income ratio (DTI). It’s a number that shows how much of your income is allotted to servicing your debt. As the example below shows, you can calculate it by dividing your monthly debt payments (that show on your credit report) by your monthly pre-tax (gross) income.

Interactive Wizard

Calculate Your Own Debt Burden

The aim is to get your total debt burden (DTI) down to below 36 percent of your income, with no more than 28 percent servicing your mortgage, if you have one. Let’s find out where you are now.

All monthly expenses that show on your credit report Complete Steps 3 and 4 of the Spending Wizard

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Debt Burden

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Monthly debt payments ÷ gross monthly income × 100

The big picture: "Total Debt"

​​If “debt burden” represents how much of your individual paychecks are consumed by debt payments, “total debt” takes a wider view. Also known as debt-to-income (DTI), it compares all of your unsecured debt obligations to your annual income. Ideally, you want your unsecured debt to be less than half of what you make in a year.

The example below shows how total debt works. Total debt over 50 percent is cause for concern, and more than 75 percent is trouble.

Interactive Wizard

Calculate Your Own Total Debt

Remember, the goal is to have a Total Debt figure where your unsecured debt is less than 50 percent of your annual gross income. If it’s over that, we’ll help you troubleshoot later on.

Total Debt

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Unsecured debt balances ÷ annual income × 100

Credit Score

“What is my credit score?”

Your credit score is one of the most important gauges of your overall debt health. Lenders use it to evaluate how risky it might be to lend you money because it’s an indicator of your past credit habits and behaviors.

These factors include the following:

• Payment History — No/fewer late payments is better.
• Age of Credit — The average age of all your credit accounts. Older is better.
• Utilization — How much of your total credit limit you use. Lower is better.
• Negative Marks — Records of delinquent or derogatory accounts. None is better.
• Credit Inquiries — Lenders viewing your credit score for new applications (aka “Hard Pulls”). Fewer recent pulls are better, although for some, like mortgages and student loans, multiple hard pulls in a 45-day period are counted as a single pull.
• Available Credit — Total amount of credit available (unutilized). More is better.

Accessing your credit score is now easier than ever and completely free. This is great because you can make more informed decisions to improve your score faster. Higher credit scores mean lower rates (aka lower payments), larger credit limits and greater added benefits (like rewards credit cards). In short, the better your credit the more willing banks will be to lend you money or to refinance existing debt for fairer terms.

Once you get your credit score, pay attention to its range so you’ll know how easy it will be for you to eliminate your debt. The better your score, the easier eliminating your debt becomes.

Interactive Wizard

What’s your credit score?

To make the best use of this guide and bolster your future financial progress, you should know your credit score. Select the score below that best represents you.

If you don’t know your current credit score, create a free account with LendingTree to get unlimited access to your credit score, and a lot more.

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Fair/Poor

If you have this credit score, it’s a work in progress. You’ll have to put in some extra effort, but you still have options for getting out of debt.

I have fair or poor credit

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Good

Good credit is a solid place to be. There are plenty of strategies available to you for reducing and paying off your debt.

I have good credit

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Very Good / Excellent

If you have a score like this, you can request a loan with a lower interest rate to pay off your debt faster and more cheaply.

I have very good credit

Your Credit Score

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If you have good or excellent credit already, you may be eligible for financial solutions like personal loans and balance transfer credit cards to enhance your debt elimination journey. If you’re not eligible, or don’t want to consolidate your debt, you can try other self-managed methods to pay down your debt. As you pay off your debt, your credit could begin to improve as you reduce your total debt and increase the amount of your available credit (each payment effectively boosts your credit).

No matter where your credit falls on the scale, you can track it for free with the LendingTree app.