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Columns: The Debt Adviser
Steve Bucci Expert: Steve Bucci
The Debt Adviser
Create a budget and find a way to get more money
The Debt Adviser

When income tumbles, reduce spending
 

Dear Debt Adviser,
My husband took a huge cut in pay and now our incoming is less than our outgoing. I am not able to work with the pregnancy and three other children. We have credit card debt out the wazoo. Please help me to know what to do?
-- Karen

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Dear Karen,
Not to make light of your very serious predicament, but when I first read your letter I was reminded of the line from the nursery rhyme, "There was an old woman who lived in a shoe," she had lots of kids and, like you, didn't know what to do. Fortunately, you have the Debt Adviser to help where she did not!

The situation you describe is all too familiar. As Americans, our expenses tend to rise to the level of our incomes. Another part of our culture tells us that tomorrow will always be better than today, so using credit to spend more than we currently earn is fine and dandy. The result is too much debt and not enough savings. This overly optimistic view leaves many woefully unprepared when the unexpected happens and our incomes are decreased. Now that we've identified the problem, what is the solution?

The only way I know to turn around a situation where more is going out than is coming in is to reverse the trend. So, the choices are to increase income or decrease expenses -- simple to write but often a bit more difficult to put into action.

Below are some suggestions to help get out of and avoid the expenses rising to income merry-go-round.

  • Start with a plan. A spending plan, that is. Until you know where every dollar is going, it will be very difficult to control your spending. I'm not saying you are spending wildly. But most people don't have a good idea of where their money is going. Small items such as buying versus bringing a lunch to work, can add up fast. Make a list of all your expenses and make some joint decisions about what gets curtailed. If the kids are old enough, you can include them too. They love to be helpful.
  • Look for a new job or a second job. I know what a pain this can be, but for a number of reasons the sooner you do this the better. One often overlooked item is that a prospective employer may check a credit report before making an offer. So I recommend that you check your credit report  for old or inaccurate information and get it in good shape pronto. Et tu? Yes, you. I know that kids can be a full-time job and with another on the way it may seem impossible, but depending on your skills and experience, you may be able to find something you can do from home part time. Telecommuting is getting bigger, and a former employer may be looking for someone just like you!
  • Maximize income short term. Only as a short-term strategy, put off your retirement contribution to help increase your income. Also, look to increase your withholding deductions, especially if you had a refund last year.
  • Downsize. Consider moving to a less expensive home or driving a less expensive car. This will only work, of course, if you can sell your home or car for more than you owe.
  • Seek help. You may need to sit down with a qualified credit counselor to determine the best solution for your problem if you are overwhelmed or not sure how to proceed. You can find one at www.aiccca.org or www.debtadvice.org. Also, you can advise the credit card companies of your situation and ask for a hardship plan. These don't last forever -- maybe six months -- but they can help you bridge the gap until you have a permanent solution in place.

Good luck!

Bankrate.com's corrections policy-- Posted: June 22, 2007
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