Putting Income and Financial Obligations Together
The worksheet in this section (below) is one of the most important tools for pinpointing why any financial troubles exist for you. In WORKSHEET 3-3, you combine information from WORKSHEETS 3-1 and 3-2, and find out whether you have more obligations than income (which means you're probably in or close to being in debt), or if you have more income than obligations (which is the first step toward a healthier financial picture).
Your annual income (from Worksheet 3-1) |
$ |
Your annual obligations (from Worksheet 3-2) |
- $ |
Your net income (may be a negative number) |
= $ |
Your annual income |
÷ $ |
× 100 |
|
Your income-to-obligations ratio (may be a negative number) |
= $ |
After you've completed the above worksheet, let's assess how you did.
10 or Greater: Your Income Far Exceeds Your Debts
Assuming you were honest in your assessment of your income and obligations, you should have no trouble establishing a budget you can live with. If you can't seem to come up with enough money to pay the bills each month or your credit card debts are growing, check out this section to find tools for tracking your daily, weekly, and monthly expenses to get a handle on where your money is going.
Zero to Nine: Your Income Just Barely Exceeds Your Debts
What this means is that, on an annual basis, you just barely get by. If you have trouble paying your bills each month, you may have one of two problems. Either your expenses are actually higher than you think (find ways to track your expenses accurately), or you may have cash-flow problems.
Negative One to Negative 10: Your Debt Just Barely Exceeds Your Income
Many people are living just a little above their means. In order to do this, they use credit cards, store charge cards, home equity loans, short-term loans, and so on to make ends meet. The problem is that if you're short $300 per month and use credit cards to pay for groceries or clothing, at the end of the year, you'll be $3,600 in debt. Ten years later, even with a credit card that gives you a decent interest rate, you'll be over $83,000 in debt!
Negative 10 or Less: Your Debt Far Exceeds Your Income
This situation often occurs during in-between times in life. For example, when you're in college or have just graduated but can't find a job, you're in between living off your parents and working full time to pay your own expenses, but you may still have the same spending patterns that you had when your parents were paying all your expenses. You may also have a lot of debt due to a layoff or medical leave, or when you have one huge debt hanging over your head, such as a school loan or unexpected medical bill.
The major reason people get into debt is that they spend more than they earn. Simple, right? Well, not really. For most people, income is fixed — you know how much your paycheck will be. But expenses can vary greatly, depending on, for example, how often you eat out, whether you update your wardrobe, and how many long-distance calls you make.
If you have more obligations than income, you're not alone. The average U.S. household has nearly $10,000 in credit card debt, which means that millions of Americans are likely to be in this exact situation, using credit cards as a way to keep up with expenses.
If you find yourself with more obligations than income, it's time to pare down some of those obligations so you have enough income to pay your bills every month.
