We sometimes oversimplify debt, as if it’s mostly a product of financial mismanagement, overspending or plain irresponsibility. Any of those can be true, but an under appreciated cause of debt is insufficient income. Even if you aren’t extravagant or careless, you can still end up buried in debt.
I think this is more common than ever for two reasons people don’t fully comprehend.
The relentless rise in the cost of living
Even though your income has been rising the increase might not be enough to keep pace with the higher cost of living. According to the Bureau of Labor Statistics you’d have to earn $1,286 in 2012 in order to buy what a $1,000 would have paid for in 2002. But it gets worse.
Certain necessary expenses, like healthcare, education, gasoline and utility costs, have risen much faster than the overall rate of inflation. If you happen to be particularly dependent on any one (or more) of these expenses the effect of inflation in lowering your income has been even more pronounced.
In addition to inflation, there are also lifestyle factors that can raise the cost of living. For example, if you’ve gone from renter to homeowner during the past decade, your housing costs are almost certainly higher than they used to be. If you’ve gone from driving a ten year old beater that you owned free and clear to a new car with a $500 a month payment your paycheck probably isn’t going as far. And it goes without saying that the arrival of one or more children will raise your cost of living substantially.
A tough job market
It’s more difficult to get a job now than it was a few years ago but that has a bigger impact than just whether or not you have a job. Tough job markets also mean smaller starting pay, lower pay raises and fewer promotions. In a world where the cost of living seems to only go up, those income constraints will make it more difficult to keep up.
It also opens the doors to more frequent layoffs. Even if you’ve recovered from a layoff, it still leaves in imprint on your finances. Many people are forced to rely on credit in order to survive during a layoff, and that debt doesn’t magically disappear the day you get a new job. It can take years to pay it off, and while that’s happening, you have one or more extra monthly payments. That requires still more income.
What to do about it
We have no choice but to live within the limits of the income we earn, but sometimes that income just isn’t enough. This is especially true if you’re paying off debt. Debt is a income reducer and until it’s paid it will continue to eat away at your paycheck.
We also need to accept that inflation is apparently a given in life, which means we’ll always need to make more money just to stay in place!
The usual steps of cutting expenses and getting out and staying out of debt always apply, but you’ll still need to increase your income, especially over the long run. How do you do that?
Always look for training and skills that relate to your business, career or job. At a minimum, stay up with changing trends but aim to stay ahead of them; you’ll be worth more.
Have some sort of side business going. Even if your employer won’t or can’t increase your pay, you’ll have to develop the means to do it.
Look for part-time or contract work you can take on that will either increase your income or help you to develop new skills and contacts for a better job in the future.
Don’t be average on your job—be great. The more your employer relies on you, the more valuable you’ll be in monetary terms.
Take on new challenges—the biggest paychecks often go to problem solvers.
What are you doing to keep your income rising fast enough that you don’t need to rely on debt?
photo by jamescollins