Tips for Dealing with Deficits

Here's a guest post from Lesley Scorgie’s Rich by Thirty: A Young Adult's Guide to Financial Success, copyright 2007 by and reprinted by permission of Key Porter Books.

So, you’re over your monthly budget. You’re spending more than you earn, which might explain why you always have to borrow bus fare from your parents! What should you do? What can you do? You have three options: reduce your spending, increase your income, or borrow money. Obviously, the last option isn’t always a good one. Let’s look at some tips addressing the other two.

Tips for Dealing with a Deficit

• Question everything. Look carefully at your budget. What are your biggest expenses? Are you spending more money on clothes each month than you need to? Is your car insurance through the roof? Ask yourself if there are lifestyle changes you can make to reduce your monthly output of cash. Eliminating two pizza dinners each month, for example, could free up $35!

• Look for opportunities. Do you have the ability to increase your income? Can you take on a few more hours at work, or make a deal with your parents to do an additional household chore in exchange for an increase in your allowance? Are you driving friends to school every day? Might they be able to contribute a small amount to your gas costs? Do you have a hidden talent that could help you earn some money on the side? These things may seem insignificant, but every little bit helps.

• Reorganize your priorities. Put your savings and investing goals at the very top of your list of expenses. These should be nonnegotiable—more important to you than a few extra cable channels or an extra night out. Always pay yourself first—even if it’s only $25 a month.

• Examine your cash flow. As much as we’d like them to be carved in stone, our expenses change from month to month. This affects your cash flow—a term used to describe the changes occurring in your expenses and income from month to month. You need to be aware of these fluctuations to have a firm grasp of your spending habits. For example, people tend to spend more in December because of the holidays. If you don’t budget for this, you might end up with a big credit card bill near the end of January. The opposite situation can occur, as well. Are you taking a two-week holiday from work in the summer? Remember to include your transportation costs in your budget for that month. The more aware you are of these fluctuations, the better able you’ll be to handle them.

• Plan for emergencies. While you’re revamping your budget, it’s not a bad idea to include an expense dedicated to building an emergency fund. If your car broke down tomorrow, would you have enough money to fix it? If you lost your job next week, how would you cover your expenses until you found a new one? No one likes to spend more than they have, but things happen. Often, people don’t plan for the unexpected. When an emergency occurs, they end up having to work overtime, pay high interest rates on a credit card, or do without something they really need. Some experts recommend you sock away the equivalent of six months’ salary in your own emergency fund. That’s a little excessive for the average person, so choose a number you find comfortable. Then, work it into your short-term savings plan (see chapter 5).

• Avoid debt. Only as an absolute last resort should you borrow money to cover your expenses. We’ll talk lots more about debt in chapter 4, but for now, just realize that borrowing to pay for something you can’t really afford is the first step down a very slippery slope. Before long, you’ll be borrowing to pay off what you’ve already borrowed, and so on, and so on. It’s much better to look at what you’re buying, and ask yourself if you really need it. You’ll be surprised at how often the answer is no.

Comments

[Jo]

Always, good advice!! I try to so hard to make savings a priority and plan for emergencies. Which I have done okay on, and it helps.

I also suggest really tracking your spending. I have been doing that diligently since the beginning of the year, before that I had a budget but wasn't good about tracking every expense. If you track every item, you can more readily see the problem areas. And when you need to rebudget...like for instance if you need to get a new car because the repairs on your old one are about as much as the car is worth...then you can easily see where you can cut and what you can afford.

(I realize I'm probably preaching to the chior, but for any newbies this may help!)

[Jake Stichler]

Last night, I did the first item in the list. Freezing my credit card in a block of ice is putting me in more of a bind than I thought it would, and now I'm just hoping I'll be able to pay next month's rent! So, I went in to Clear Check Book, and was surprised to find that somehow (though I usually don't trust CCB's reporting features to be accurate) I'm standing at -$564 on the month. Tempts me to look back through all of the entries for March and see what the heck I did wrong.

[Rachel @ Master Your Card]

I think that avoiding debt is they key item in your list. It is very easy to get into debt these days and it can seem like a very easy solution in the short term but canlead to major problems in the long term.

[Mike Hunt]

Send this post to Obama. He likes talking about tough choices while throwing money at the problem like a drunken sailor!

-Mike