Is Making More Money or Limiting Spending Better for Getting Out of Debt?

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When we fall behind on our bills, our initial hope and wish is that we made more money. If only we had higher incomes, we wouldn’t have money problems, right? If that were the case, then Kanye West wouldn’t be $53 million in debt. Kanye and others with extremely high incomes going broke and crashing into debt is proof that higher incomes don’t make money problems go away. While it is always nice to get a raise, a promotion, or a new job with better pay, it’s not the magical solution to getting out of debt.



Live within your means.

Getting out of debt and budgeting in general is all about living within your means. You need to really sit down and figure out how much you currently make, how much you currently owe, your monthly expenses, and budget accordingly. I’ve read and heard countless different theories about how to get out of debt and none of them say “just get a better job.” Limiting your spending is the key. Limiting your spending doesn’t just mean that you can’t spend any money on anything other than gas and groceries. If you go that route, you’ll just get frustrated with your new budget and you’ll be less likely to stick with it. A budget that sets you up to fail isn’t going to last.

Limiting your spending can take any form you’d like. A good guideline to start out with is a classic budgeting technique called the 50-20-30 budget. With this budget, 50% of your take-home income goes to your needs, 20% goes to savings and debts, and 30% goes to wants. Things that fall into your needs category are things like gas, groceries, rent/mortgage, insurance, and other boring things that are annoying to pay for. Savings and debts are just that. Savings accounts, retirement accounts, car payments, credit card payments, and stuff like that. When taking a look at your wants category that should take up about 30% of your take-home income, you need to be honest with yourself. These include things like cable/satellite, subscriptions, entertainment, and hobbies. It can be tough to be honest with yourself in terms of what counts as a want and what counts as a need. However, it can also be a good feeling when you find something that you can just cut out of your budget completely like a satellite TV bill.

The 50-20-30 budget isn’t a hard and fast rule that you must live by. It’s just a good starting point if you’re going from no budget at all to making a real plan for your finances. If you figure out that your needs cost less than 50% of your income, great! You can put that extra percentage elsewhere in your budget. If your needs cost over 50% then you need to get a little more aggressive about what you cut out of your wants category. It’s totally up to you how you want to customize your budget and that part can actually be kind of fun!

After you’ve figured out the real cost of your needs and wants, it’s time to dig into the twenty-ish percent that pays for your savings and debts. Savings and debts fall into the same category because there’s some flexibility between the two even though they’re kind of opposite. You might be tempted to just put all 20% of this part of your budget towards student loans or a credit card. Not so fast. It’s very important to have a robust emergency fund before aggressively attacking your debt. If you need to pay an unexpected medical bill or of you need a costly surprise auto repair, you really aren’t going to want to use your credit card. It’s up to you how much of an emergency fund you need. Personally, I think it should be at least $500. After you have your emergency fund established, then you can spend less on your savings and more on your debt. It might take a while to get to this point, but don’t get discouraged. When you do start making some more noticeable progress on eliminating your debt, it will be well worth the wait.

Getting a raise won’t save you.

Don’t get me wrong, getting a higher income is an awesome way to help your finances for obvious reasons. The potential problem is thinking you can bump up your standard of living because of your new, higher income. If you get a 5% raise, get excited, and go get a new car that gives you a 10% higher monthly payment, then you’re worse off than you were before. This is just one example, but there are a lot of other ways we subtly treat ourselves when we get a raise or a promotion. Have you ever gotten a tax return or some other sort of windfall only for it to disappear and you’re not really sure how you spent it? It’s kind of like that only smaller and harder to notice. This makes it all the more important to limit your spending and actively manage your budget. When you do get a raise, a promotion, a new job, or some sort of influx of cash, it won’t disappear on you. You’ll be better prepared to handle it and work it into your budget accordingly.

So when will I be out of debt?

I hate to break it to you, but there’s no secret to getting out of debt quickly and easily. Set realistic goals, make a reasonable budget, spend responsibly, and be patient. When you figure out how much you can afford to put towards your debt every month or every week, you have a realistic path to when that debt will be paid off. Establishing a finish line and knowing there’s an end in sight will give you the confidence you need to reach the financial peace you’re looking for. Now fire up an Excel spreadsheet and get budgeting!

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