When estimating how much you should put toward your student loan payments, a credit counselor might tell you to aim for 8% of your monthly gross income. But to get close to that number, you might find yourself budgeting until you’ve got the blues, trimming expenses left and right.
So what do you do when you run out of expenses to cut?
That’s the first of five reasons to spend more time increasing your income — and less scraping your budget — when attacking your loan debt or any other financial challenge.
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1. Expenses are finite — income is not
We all need to eat meals, live under a roof and have access to transportation. Bare necessities like these cost money. Try as you might, you won’t be able to trim your expenses to $0.
By downsizing your living situation and making smaller cuts, such as to the cable TV cord, you might be able to remove $500, $1,000 or maybe even more from your monthly budget. But there’s a limit to how far frugality can take you.
Your income, on the other hand, has no ceiling. Sure, you might feel unable to earn a six-figure salary if you’re a public school teacher. But you could always change your circumstances through education, hard work and goal-setting. Some options for our hypothetical teacher include:
- Advance your career: Become an administrator, such as a school principal
- Start a side hustle: Teach online, tutor off-campus or write textbooks
- Open a business: Create a teaching academy or tutoring program
If you’re not especially passionate about your job and are aiming for a higher wage, you could also take the more drastic step of transitioning careers.
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2. Cutting expenses won’t help you stay out of debt
Forgoing typical expenses can get you out of a jam. Say you need to come up with your minimum student loan payment: Skipping a dinner out with your friends could get you all the way there. That’s the beauty of budgeting. Take from here to help out over there.
But what if you struggle to come up with your monthly payment every month, not just once in a while? Well, then you wouldn’t be alone. Consider that two out of five American adults don’t have the cash to cover a $400 emergency, according to a 2018 report from the Federal Reserve.
Increasing your income can get — and keep — you out of financial jams. With more money coming in every month, you give yourself much more leeway to save up and can account for unforeseeable events like a job loss or medical bills.
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3. Income affects your ability to manage your debt
By cutting “fat” in your budget, sure, you can meet or increase your monthly debt payments.
But increasing your income affects your ability to manage your debt, not just repay it.
If you have outstanding student loans and are hoping to refinance them to a lower interest rate, for example, lenders will want to take a peek at your debt-to-income (DTI) ratio. If your DTI’s out of balance, you could fail to qualify for low interest rates or be denied for the new loan altogether.
Some banks, credit unions and online student loan refinancing companies even require applicants to prove a minimum income to qualify. At top-rated lender Splash Financial, for example, you’ll need an income of at least $42,000, whether you have a lean budget or not.
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4. Income helps you achieve ambitious financial goals
A budget-only approach ensures you live as affordably as possible. By prioritizing income, however, you can afford the lifestyle you actually desire.
For many people, the three big financial goals are saving for college, buying a home and investing for retirement. Others might have more unique goals, including funding their own business or traveling the world.
No matter your grand aspirations in life, you could view each of them as potential expenses. And it’ll be impossible to tack them onto your budget if your income hasn’t increased.
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5. Income development takes more time & effort
By taking a money holiday, you should be able to create a budget and fine-tune it, canceling unnecessary subscriptions and negotiating your routine bills. It could take more than one day to downsize your car or lower your rent, of course, but these are relatively fast paths to saving.
Unfortunately, unless you receive an unannounced financial windfall, you’re not going to be able to increase your income as quickly. Even asking for a raise at work might take a while to hit your paycheck. Similarly, you might have to make a bit of an investment into a new side hustle before you start to see dividends.
Developing and diversifying your income takes months or years — some say it never ends — and there’s no clear-cut way for everyone to reach the heights they desire. If it’s going to be a long slough, even a worthy one, better to start now.
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Where your income & budget work hand-in-hand
Of course, increasing your income won’t do you much good if you don’t already have a budget — or, ahem, spending plan — in place. It can help you keep more of your larger income.
If you were recently promoted at work, for example, budget to utilize your raise wisely.
Still, the argument here is to obsess less over your budget and more about developing multiple streams of income. Unlike the former, the latter comes with a cushion.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
Image Credit: DepositPhotos.com.
