If you consistently earn more than you spend the difference is joy. If you usually spend more than you earn the difference is misery. These differences are frequently described as disposable income.
In the first scenario your disposable income is positive where you have surplus money left over (after you have paid all your living expenses including your priority and recurring bills and made all the contractual payments on your loans, credit cards, store cards and overdrafts). You can save this surplus or you can use it to reduce the balances on your debts further or you can spend it or you can even give it away if you want to. Hence, such a difference is joy!
In the second scenario, your disposable income is negative. While you may be able to pay your living expenses including your priority and recurring bills you have insufficient money left over to make even the minimum contractual payments on your loans, credit cards, store cards and overdrafts. As a result, month after month, the balances on these debts increase as penalties and (late payment) charges increase the debts even more. Hence, such a difference is misery.
How do you change such a difference from misery to joy? By earning more?
Yes, we all wish there was such a magic wand. In truth however there are solutions provided you are willing to address the issue. It’s a bit like giving up smoking – you have to have the will to tackle the problem. Increasing income may be difficult but sometimes there are opportunities which we overlook.
- For example, can we take in a (paying) lodger?
- Can we change our work shift from say days to nights or weekends?
- Can we take on a second (part-time) job?
What about the spending side of things?
- Do we need a car?
- Could we make do with public transport?
- Can we cut back on socialising, entertaining, smoking, retail therapy, holidays?
Make a Budget
Household Income
Only one way to find out – make a list! Or, rather, make a number of lists. The first list will go on a blank page entitled ‘INCOME’. On this page, we will jot down all sources of income. If married or co-habiting the income items will include the income of our spouse or partner. Let’s call this page ‘HOUSEHOLD INCOME’. Let’s not forget housing benefits, child benefits, child maintenance, pensions, interest from investments, dividends, tips and so on.
Expenses
The second list will be entitled ‘SPENDING’ or if we want to be a little more posh – ‘EXPENDITURE’. The items on this page will start with the essentials for living: shelter, food & drink, clothing, water, heat & light, transport. These are expenses we simply must pay to be able to live. So the first item is often one of the biggest – the mortgage or rent. Housekeeping covers a multitude but food and drink are essential for life – let alone living! And so we go on, listing every item on which we spend money regularly (every month) or intermittently (e.g. once a year – such as car insurance). We need to itemize the list in as detailed a way as possible, ensuring we put the amount of expenditure against each item.
Disposable Income
Next, we add up the totals for ‘HOUSEHOLD INCOME’ and ‘EXPENDITURE’. Now let’s compare our totals. Let’s hope that there is sufficient disposable income to make the contractual payments on all loans, credit cards, store cards and overdrafts. If the answer is yes, then we have joy! If the answer is no, we have misery – at least for the time being. What can we do about it? Well, if we cannot increase income we must try to reduce expenditure. Let’s look at each item and see where we can cut back. If we are still in negative territory after making all the cutbacks that we can then we must find a new solution. We are probably insolvent. It is time to seek third party advice.
Solutions may include negotiations with creditors or entering a debt management plan, or obtaining a debt relief order, or entering into an individual voluntary arrangement or even petitioning for bankruptcy. There may be other possible solutions such as selling an asset such as a house or obtaining financial assistance from a relative or family friend. All these options can be explored with help from CAB, the CCCS, PayPlan or from one of the many excellent fee-charging commercial insolvency advice firms out there. The important thing is to do something because misery will not go away on its own.