One of the biggest money mistakes people make is spending more money than they have. In theory, it sounds impossible. If you only have a $100, how could you spend $200? Here’s how.

How People Spend More Than They Have

  1. Dipping into savings or investments.
  2. Borrowing.
  3. Using credit.

You can spend like this for a little while, but if you keep doing it, you’ll run into big financial trouble.

When you take money from your savings, you risk having nothing to fall back on in the case of an emergency.

Anytime you borrow money – even from friends and family – or use credit, you create debt. The more you do it, the deeper in debt you become. Most people don’t realize the debt they’re creating until they’ve maxed out all their credit cards, dried up all sources of income, and drained their savings. Once you reach this point, it will be a long hard road to getting your financial life back on track.

Preventing Negative Income

  1. Recognize the signs. Negative income is my short way of saying “spending more than you make.” The best way to stay out of debt is to avoid it altogether. If you notice that you frequently have to dip into savings, borrow money, or use a credit card to cover ordinary expenses, it is a clear sign that you are heading towards trouble. Don’t ignore the flashing red lights. The moment you realize you’re spending money you don’t have is the time to take the steps necessary to prevent further debt. 
  2. Track your spending. At this point, you need to start tracking your spending to see where money is being lost. Use cancelled checks, paid bills, credit card statements, and bank statements to see where you are spending money. Calculate your total spending for an entire month. It’s easier to see outages when you group kinds of spending together, e.g. gas, bills, food, and entertainment. 
  3. Cut back. Once you’ve tallied your total spending for a month, take a look at the categories of spending. Is there one area where you have spent more money than necessary? When you figure out where you are spending more money then you should, come up with a plan to spend less. Spending too much in gas? Find ways to drive less. For example, car pool to work, combine errands, or have your friends come to your house one Friday night instead of you going to theirs.

It’s not uncommon to get caught in the trap of spending more money than you make. The key is to realize the situation as early as possible and take the steps to correct it.