Increasing Income Vs Decreasing
Expenses - The Ultimate Debt Relief Question
Understanding how you get
into debt is very easy. On one side of
the equation you have your income. You probably have a very good
idea of what that is. On the other side of the equation you have
expenses, and most people have a far more limited grasp of what
that is. Try this experiment with anyone you are comfortable
discussing money is. First ask them what their income is. Almost
everyone will be able to tell you either a weekly amount that is
deposited in your bank account or the yearly amount in their
contract. Now ask them what their expenses are. Practically
no-one will be able to give you an exact number. And that's just
the way businesses built on accumulating debt like it.
This article examines the question whether it is better to
increase your earnings or to decrease your spending. The obvious
answer is to do both, but which will have more effect on your
debt levels.
Let's go back and look at our earlier experiment. Most people
don't actually know what their expenses are. If you press them
hard enough they can probably recite them one by one and add
them up. Eventually they will get a number that will probably be
a rather unpleasant surprise for them. Let's say that number is
$400 per week for the sake of argument. When you break that down
there will be expenses that can be forgone, and expenses that
are always going to be fixed in place. You can drop your drink
on the way home from work every night, but you can't stop paying
your rent. You can save money by taking a bus instead of
walking, but you can't stop buying groceries every week. Once
you've gone through all of these things let's say you can reduce
your spending by 25% - that's $100 per week. That gives you $100
extra towards paying your debts. Pretty good huh?
Now let's look at our income. To pay the same $100 of debt we
need to increase our wage by more than $100(don't forget the tax
man doesn't care about what you owe - just what you earn). So
let's say we want to increase our wage by $130 per week and we
work a 40 hour week. That means that we need to get a pay
increase of $3.25 per hour. Now, you can try asking your boss
for another $3.25 an hour - good luck to you, but you are more
likely to get that extra $100 per week by reducing what you
spend than by increasing what you are paid for what you do.
So on the surface it looks better to reduce expenses right?
Well, no. You see there's a problem with that reasoning. Suppose
I wanted to pay off $150 instead of just $100. Where can I get
that extra $50 from. I've already cut my expenses to the
absolute minimum, and to be honest it's made life pretty
miserable. I cannot possibly reduce my expenses any further -
but my income? I can pick up another 15 hours of work and I have
my money, if I want I can increase it another 5 hours and get
even more money. If I'm smart I will work smarter rather than
longer and increase the amount I am paid each hour rather than
the number of hours I do.
The point is you can drop expenses so far, and then there is
nothing you can do. You must eat. You must pay rent or mortgage
or rates. But with income - you can increase that as much as you
are able to. And every time you increase that a level, your debt
is a little easier to pay off. Further more - when your debt has
finally been paid off you can start looking at ways to get that
big income you have built up working for you.
