What To Do When Your Bills Exceed Your Income
It is the end-month. The salary is already in your account. You pay all your bills but still, find that there are other pending expenses. You’re forced to borrow to meet these needs. Initially, you pay everything due using borrowings and promise yourself to expand your income in the coming month so that you can meet the bills and pay off whatever you borrowed and still have something to spare. However, the next month ends and again, you are caught up in the vicious cycle of paying the bills first and borrowing again to meet the other pending needs. You get entangled in a labyrinth characterised by the bills and expenses exceeding your income. What do you do?
Initially, you must become brutally honest with yourself. Remember, it is you who is in control of your life. There may be general external forces such as cash crunch and the general rise in the price of items within the economy that makes it hard for you to manage your bills. Also, there may be internal factors such as unexpected hospitalisations that dent your finances and keep you entangled in lack for longer. Honesty with oneself would entail being aware of your cash flow and net worth to determine how much you need to come out of the labyrinth. The next step is to have an action plan that would put you on a journey towards becoming financially free. Personally, I have been in this labyrinth before. Even though I am still on the journey to financial freedom, I feel that it would be necessary to share the tips I found helpful in coming out of the vicious cycle of having more expenses than income. The tips are summarised into an ABCD framework*.
Assess and Analyse (A)
The first step to handling any crisis often entails assessing and analysing the factors that led to it. From a personal finance perspective, it would be imperative first to analyse and assess your financial position. First, determine your net worth. Essentially, net worth is computed as assets minus debt. Your assets would include the physical assets (land, car**, electronics**, real estate, furniture**) and the non-physical ones (bonds, stocks, treasury bills). Debt emanates from loans. For the physical assets, conduct a revaluation exercise to determine their worth as of today before deducting the debts to determine your net worth. If your net worth is positive, you have a lifeline. However, if it is negative, it implies that you would take longer than usual on your journey to financial freedom.
After knowing your net worth, assess your cash flow. Fundamentally, cash flow entails conducting a “money in versus money out” analysis of your finances. The moment you know your cash flow, it becomes easier to expand your “money in” column and constrict your “money out” column. But, on the other hand, if the money that goes out is more than the money that comes in, it signals you to conduct a lifestyle assessment, and that brings us to the next point.
Break Down (B)
Once you know your net worth and cash flow, it is imperative to break down each element into specific categories. It takes initiative to get started and discipline to get going. For a start, break down your bills and debts into specifics. For instance, determine your daily spend on various expenses such as food, transport, airtime, and other necessities. Also, determine the bills that are due monthly, for instance, rent, credit card payments, utilities (water, heater, and electricity bills), entertainment, and insurance. Moreover, determine the necessary monthly deductions such as car loans, development loans, and mortgages.
From an income perspective, know your salary. If you have side hustles, conduct a background check on the average monthly income by first determining how much you have made in the past three months and dividing the total figure by 3. In this regard, you would have determined your quarterly earnings from your side hustles.
Once you know your income and expenses, you are in a position to know where your money comes from and where it goes. It becomes easier to know where most of your money is going and check whether your income is sustainable. If you are caught up in the labyrinth of expenses being more than income, the next step becomes handy.
When cutting off the unnecessary expenses, first determine those that are contractual. In essence, contractual expenses MUST be paid and include rent, mortgage, loans, credit card payments, insurance, and utilities. The non-contractual expenses are those which can be compromised. For instance, if you have been paying for luxuries such as clothing and entertainment, it is high time that you cut down on them and dedicate the expense towards quickly paying off the contractual expenses. You could also adopt a healthier but cheap diet characterised by eliminating carbs and sugar and replacing them with more vitamins and protein. However, be sure that the adjusted diet plan provides enough energy to get you through the days and not be a matter of starving yourself at the expense of your health.
A lifestyle analysis is an initial step for getting started in the cutting of unnecessary expenses. Essentially, there is a need for analysing your consumer behaviour to understand your spending habits. Knowing the FIXED and VARIABLE expenses would enable you to pay up the fixed expenses, which are primarily contractual and adjust your variable expenses to cut overspending. Most of your discretionary expenses, which are spending on luxuries, are adjustable, and in some instances, you could eliminate them altogether. For instance, if you have enough durable shoes and clothing to facilitate your locomotion, there is no need for purchasing new ones. Also, you may eliminate eating out even when you consider it as a routine to treat yourself for an achievement well done. Instead, find other cheaper yet fulfilling activities to reward yourself for achieving your milestones. Initiating the cutting off of unnecessary expenses requires you to be firm on your financial decisions.
The journey towards financial freedom requires you to take decisive actions. Your decision to readjust your lifestyle to leave within your means would facilitate your transition from being entangled in debt to transiting into financial freedom. I have mentioned earlier that initiative would get you started while discipline will get you focused on your journey towards becoming financially free. A good trigger alert when you are on the verge of overspending would be to question yourself constantly, “do I NEED this, or do I just WANT it?” Oftentimes, wants expose you to a life where you live beyond your means while needs have to be fulfilled.
In hindsight, steps 2 and 3 are where the rubber meets the road. It would require discipline to get yourself out of the mess where you are entangled in the vicious cycle of bills exceeding your income. To get started, start tracking your income and expenses today. Take note of the expenses that you can eliminate. Also, find ways of expanding your income. Expanding income would entail being aware of market needs within your environment and starting side hustles that would best fulfil the needs and enable you to make money in the process. If starting a relevant side hustle is hard, you could dispose of some of your assets, and that is why conducting a revaluation of your assets during the net worth analysis is necessary. For instance, you could find that selling off your car would help pay off two or three contractual deductions, such as a development loan or the emergency loans meant to pay off the surplus expenses. For a while, being car-less would dent your ego because it seems like a downgrade. However, you would rather be car-less and debt-free than having a car, yet you are choking on debt. After all, we all desire a life characterised by financial freedom. So choose wisely – would you rather fulfil your ego needs or be free?
**car, electronics, furniture – there are different perceptions regarding whether these kinds of possessions are assets or liabilities. Defining an asset as an item that adds more income into your wallet would imply that these possessions are not assets per se. However, if you were to consider the accounting definition of assets, cars, electronics, and furniture would qualify as assets whose value depreciate with use over time. Hence, that is why I wrote that you need to conduct a revaluation exercise to determine their present value before disposing them.