What To Do When Your Bills Exceed Your Income

What To Do When Your Bills Exceed Your Income

What To Do When Your Bills Exceed Your Income

You lose a job.

You have an unexpected large expense.

Your lifestyle creeps up without notice.

Suddenly, you’re in the hole. Your monthly costs exceed your income and that feeling of dread, desperation and panic take you by the throat. Sometimes, it happens because of our own making and others, a factor of circumstances beyond our control.

Regardless of the reason, steps need to be taken in order to get your head above water because drowning is not an option—it is not your path.

Credit cards: One of the greatest areas where we tend to get into trouble. There’s nothing easier than whipping out the plastic and deferring the pain—but there in lies the trap. It seems easier to try and maintain your lifestyle on the back of debt than to change your lifestyle. The hope for a new job arriving, a bonus, an inheritance, a lottery win or if things get really tough, a loan from your 401(k) plan—all dangerous to fall back on. Before you know it, you’re in a cycle of revolving debt.

Another problem area is lifestyle creep. You use that well-deserved raise to buy more expensive toys, take more expensive vacations, and tack on those “extras” more frequently. If any changes occur that impact your income negatively, you are liable to find yourself in difficult straights. Unless you track your spending by category, it’s difficult to spot the culprits before the scales are tipped towards disaster.

So—when the realization hits that you’re in trouble, what do you do? Here’s where you shouldn’t start: Researching bankruptcy or companies that will go to the credit card companies and look to restructure your debt. Blame and shame will not fix your problem. Your resilience is necessary to put yourself back on the right road.

Following are your ABC’s you should learn and follow if you find yourself in this situation.

  • Assess and Analyze– You must assess your situation before anything useful can happen. Take the time to analyze your financial position; your net worth (assets minus debt) and your cash flow (money in vs. money out). Write it all down.
  • Break Down– Once you have the big numbers, break them down into specific categories (how much you spend on food, clothing, rent, credit card payments, loans, entertainment, insurance, personal care, vacations, etc).
  • Cut– Cut the fat. If it’s not contractual or necessary to live (like food), eliminate it. No excuses. Rent/Mortgage, Loans, Credit card payments are all contractual—you have to pay them.
  • Decide– Decisive action is necessary to put your financial life back into equilibrium. Your decision to live within your means is necessary and important in getting through this difficult time. This will help you sleep through the night sooner.

For many, eliminating the discretionary spending is enough to put their budget back into equilibrium. Yes, there is a degree of pain in parting with the goodies to which you’ve grown so accustomed. But sometimes, a reset is necessary to bring awareness and a new point of view. Behavioral finance research has shown us that we are most in tune with our current feeling, and thinking about pain that happened in the past feels distant and hard to place. So if we are feeling badly now, it’s hard to remember feeling good. But, just like the ups and downs of the stock market, our lives follow a non-linear path; successes and failures occur; expectations are reached and are not.

For those whose changes cannot be fixed by making difficult but manageable cuts, the steps are a little more challenging. You might have to make structural changes; you might need to sell your home and move to a less expensive location; you might need to contact your creditors and explain the situation; requesting that they work with you as your try and repair your current problem.

In any event, know your preferred outcome, make sure you file your taxes, communicate with creditors, monitor your progress, make decisions based on reasonable expectations and work hard to move yourself forward one step at a time. Each inch forward moves you in the right direction. I know you can do it!