Overcome cash flow challenges to achieve a balanced budget
Focus on securing the income you need to balance your expenses.
Income is the foundation of financial stability. When cost of living outstrips what you’re able to bring in, it creates budget gaps that lead to debt. Balancing your expenses against your what you earn is essential if you ever want to get ahead. But how can you overcome lack of income in today’s challenging job market?
The articles in this section all focus on helping you understand current pay trends in the U.S. You can learn how to overcome salary challenges and how some Americans boost their cash flow with side jobs. With the right strategy, you can achieve budgetary balance that helps you avoid debt and save effectively.
5 tips for balancing income versus expenses in your budget
#1: Know your income-to-expense ratio
In order to maintain a balanced budget, you should keep track of your income-to-expense ratio. As the name suggest, this measures your income versus cash outflow. It’s easy to figure out:
Total monthly income ÷ total monthly expenses x 100
If your ratio is less than one, it means you spend more than you bring in – that’s bad. This usually means you rely on credit cards, payday loans or other high-interest types of credit to get by. You slowly amass debt that seems insurmountable to pay back. If you’re in this situation, you either have to reduce your expenses or increase your income.
Ideally, you want your ratio to be 1.25 or greater. That means you spend 75% of what you make, leaving free cash flow in your budget and money to save. You can use free cash flow to cover unexpected expenses and set aside money to build your emergency savings fund.
#2: The fine art of the side hustle
One of the easiest ways to increase your income is to take on a secondary or side job. This can be anything from becoming a ride hailing driver to working freelance in your career field. Your goal with a side job – besides boosting cash flow – is to balance it with your life. You don’t want something that interferes with your primary paycheck. If you freelance, make sure to check your employment agreement to ensure you don’t violate any non-compete clause; the same is true with consulting work.
Here are a few ideas for good side hustle jobs:
- Freelance in your chosen career field
- Consulting work within your profession
- Flexible be-you-own-boss jobs, like working for a ride hailing company (Uber/Lyft)
- Work-from-home data entry
- Service jobs, such as waitressing or bartending
- Seasonal employment, like working as a mall Santa to boost your income for the holidays
#3: Be aware of how the economy can affect your income
Loss of income is common in a down economy. Even if you don’t lose your job, your employer may cut your hours or limit allowed overtime. If you work a job based on commission or one that relies on tips, it’s hard to keep income steady. When people don’t spend, and stop dining out, you can take a big hit.
Any loss in income should immediately lead to a reassessment if your budget. You need to cut back on your expenses as quickly as possible so you can avoid taking on debt. Another way to balance you budget is to consolidate existing debt. Many consolidation solutions decrease your monthly debt payments, sometimes by as much as 50 percent. That can go a long way to helping you overcome loss of income.
#4: Where you put income when you earn it matters
If you’re one of the estimated 106 million Americans who are “unbanked” or “underbanked” you’re probably losing money to fees. Checking cashing stores are not a smart substitute for a regular checking account. You lose money about $3-$10 out of every paycheck (or more depending on the size of your paychecks). You also often incur bill payment fees if you pay bills through money orders.
Some people assume this is more cost effective than traditional banking, because bank fees are just as bad. But if your bank fees are high, that means you have the wrong account. Look for a checking account that fits your lifestyle. If you’ve struggled with maintaining a checking account in the past, look for one that offers:
- No minimum balance requirement
- Overdraft protection
- Free online or mobile bill pay
- No monthly maintenance fees
For that last feature, you may need to meet certain requirements in order for your bank to waive those fees. Some banks will waive fees on certain accounts if you are a student. In other cases, you can avoid fees if you sign up for online banking or set up Direct Deposit.
Research banks and other financial institutions carefully. If you don’t trust major national big banks, look for local banks or credit unions. These tend to be more focused on customer service, so you can worry less about your bank screwing over customers. Then, once you find a bank you like, understand how your checking account works and do what you need to do to minimize fees.
When used correctly, the right traditional checking account will always have lower fees than nontraditional banking through check cashing stores. If you pay too much to bank, the solution is not to stop banking. It’s to find a better bank with a checking account that fits your needs!
#5: The best income is unearned income
Earned income is what you get from your paychecks. You work, they pay you for that work. But there’s another kind of income that everyone should aim to achieve. It’s called unearned income.
The IRS defines unearned income as any money you receive from not doing actual work. It includes earned interest, dividends and yields on investments. It also includes things like gifts, prizes and inheritance. However, those are not sources of income that are in your control. What is in your control is the ability to put your money where it can work for you.
Unearned income is typically subject to different taxes. You don’t pay payroll taxes or Social Security on it. But you often face unearned income tax. When it comes to things like retirement accounts, you can pay taxes before you contribute or when you make withdrawals. It depends on which types of retirement accounts that you have.
The earlier you can start making your money work for you, the less you have to work. Even if you’re not ready to start investing, take small steps to achieve better growth. For example, check your savings account interest rate. If it’s less than 1 percent, look for a better savings accounts. You can also consider investments like Money Market Accounts and Certificates of Deposit (CDs). These tend to have better rates, too. By incrementally building your saving strategy, you can gradually increase unearned income.