So far we’ve covered the basics of how to set up a budget, from income to expenses, categorizing expenses and dealing with intermittent expenses. Now we put it all together, and figure out if Trish has an income problem or an expense problem.
Trish realizes she’d in some trouble. After putting her intermittent expenses in the budget she gets this:
Negative $74 per month. Not good. Even though her budget is going to change in the next few months as her intermittent expenses payments change,* she’s still under water each month.
Trish recognizes this is a problem. But what is the source of her problem and how should she best fix it? With a budget, there are two kinds of problems:
- An Income Problem
- An Expense Problem
Since the equation is Income – Expense = Net Income, either you can increase your income or decrease your expenses.
Trish earns $28,000 per year. The median income for a single woman with a bachelor’s degree age 25+ is, according to Wikipedia, $31,309. This suggests that she’s underearns. While it is to be expected at this stage of her life, Trish should make sure she’s taking steps to increase her income. Since she probably can’t just march into her boss’s office and demand an immediate raise, she’ll have to look to other options to increase her income.
She could take the long view or the short view. With the long view she’d look to maximize her earning power over her lifetime. Since she’s a recent college grad, she probably has a lot of space for professional advancement. She could take evening classes or work toward certifications in her field, but there are some downsides to this. Not only does pursuing additional education take time, it also usually takes money. The time she spends on long-term career advancement is usually the evenings and weekends, which is prime time for implementing a short-view approach to get more money. Also, we noticed that her budget doesn’t have any wiggle room for paying for these classes. If the planets align and she can get a hard promise of an income increase from her boss for the completion of a course of study that the boss pays for, then the long view approach may be right for her. Since that’s unlikely to pan out, let’s take a look at the short view approach.
The short view approach is to get a second job or sell stuff. It’s more of a get money quick scheme than anything Trish can maintain for extended period of time. Since Trish is a recent college grad, it’s unlikely that she’ll have anything that could be sold for any value. If she would’ve been older, and had accumulated more stuff, then selling it might’ve been an acceptable strategy. On the other hand, since Trish is a recent grad, she may have the time to get a second job, if one is available. The second job could help her get her income up high enough to give her the slack she needs to get her intermittent expenses covered.
Finally, She could also increase her work on her internet sales business. Trish only does the business for the extra money, so she won’t commit a lot of resources to ramp the business up. She also has no intention or replacing her career with the business.
From what we saw above, some of her problem is an income problem. Could she also have an expense problem? Find out in Smart and Sassy Guide to Budgeting: Part 6: Expense Problem.
* All the intermittent expenses will happen in the next few months. After they occur, they will all be divided by 12 months instead of the 1-3 months they’re currently being divided by.