12 What if spending exceeds income?
What are the options?
- Do nothing and hope things get better. Things might get better (an unexpected Lotto win?), but they might also get worse (an unexpected car repair bill?). Unexpected bills are a common reason why people go into debt.
- Increase income. This could be done by working overtime or by taking a second job.
- Reduce total spending and change the pattern of expenditure.
Let’s assume that the first approach is rejected, and that the second is not realistic for the moment. This leaves the third option – reducing total expenditure and changing the pattern of expenditure.
Although reducing total expenditure is all that is necessary to close the gap between income and expenditure, in practice this will involve changing the pattern of your spending too. This is because there are some forms of spending that are difficult to reduce and so others will have to take a bigger hit. For example, you might not be able to reduce spending on your accommodation or your travel, and so all the savings that you need to make are going to fall on the other items. It’s also very hard to carry out a plan simply to reduce total expenditure. Where and in what way the cuts are to fall has to be decided in advance.
The first step involves thinking about essential and non-essential expenditure. Spending on food and housing would be defined as essential, but other items are less easily defined.
Look at the goods and services you spend money on. Which do you consider to be essential?
Where particular goods or services are seen as essential, expenditure on them can’t be cut out completely. In this instance, budgeting is more about reducing the costs of these and other items, for example by buying fewer of them, or cheaper versions. Part of this process usually means careful shopping around, searching and comparing prices.