Budgeting Strategies for People in Financial Distress

Christina Austin

At some point in your life, you have probably experienced financial distress. Maybe it happened after losing a job, or while paying for college, or while trying to pay off a large credit card bill. Financial distress can be overwhelming, but it can be managed if you have a strategy for tackling it. There are a few tried-and-true methods that have worked for people over the years. At the end of the day, though, you’ll need to cut your expenses if you are spending more than you make each month. This doesn’t mean you can never go out to eat again or buy another concert ticket again. It just means you need to decrease your expenses temporarily while you pay off your bills. Developing a budget will help you stay on track in the future so you know exactly how much money you can afford to spend on fun things each month, and how much you should allocate for necessities like food, rent, and electricity.

Why budgeting is so important

Establishing a budget is crucial to financial success. Your expenses should fall within your means, but you won’t know what your limits are without a budget. A budget will help you understand how much you can and should be spending on different categories every month -- utility bills, clothing, food, memberships, rent, etc. It involves comparing your monthly income every month with what you need to pay off every month. It includes understanding your monthly wants and needs and weighing them against each other. Budgets may ebb and flow with changing income and life circumstances, so it’s important to update your budget every so often.

If you want some automated help on managing your budget, check out apps like Mint, Pocketguard, Honeydue, and Personal Capital. At the end of the day, following a budget means that your monthly income can always cover your monthly expenses. That way, you avoid falling into debt and hurting your credit score.

Popular strategies for individuals in financial distress

The envelope strategy

Cash each month’s paycheck and divide the cash into labeled envelopes for each category of your monthly expenses. Calculate what percentage of your monthly income you can afford to spend on each category and put that amount in each envelope. Pay the month’s bills using only the money in the envelopes. When an envelope is empty, you cannot allow yourself to spend any more money that month in that category, or, you need to take money out of another envelope to cover the expense. This way, you are only spending money you have and not going further into debt.

The pay-yourself-first strategy

Cash your monthly paycheck and set aside a predetermined percentage into a long-term goals or 401k envelope or bank account. Use the rest to pay off your monthly bills. Develop a system to make sure you only spend what you have, and not more, each month. This method helps you save money for the future, which may not always be possible depending on your financial situation. Regardless, you should also try to save for the future, even if it’s just a few dollars a month. Saving for the future is a good habit to develop since, one day, you will be retired and will need to live off of your savings.

The 50/30/20 strategy

Every month, allocate 50% of your income for necessities, 30% for fun expenses, and 20% for the future (in a savings account). If you can’t afford to save 20% of your money each month, save as much as you can or decrease your fun expense amount so that you can save more.

Cut your expenses as much as possible

If you’re not able to pay your bills in full each month, you should reevaluate how you spend your money each month. Do you get take-out or go out to eat twice a week? Maybe you need to stop going out to eat altogether until you get your expenses under control. Buying groceries and cooking your own food is an easy way to save money. Do you spend lots of money on new clothes each month? Stop this habit until you are out of debt. If you need a new outfit, shop at consignment stores where clothes are cheaper, or ask friends for hand-me-downs they are planning to donate. Spending too much on gasoline each month? Consider walking, biking, or taking public transit instead. Is your power bill tough to pay off? Get into the habit of turning off lights when you leave a room or not running your heat or A/C as often. Be mindful of how you are using electricity in your home. All in all, you should understand how your money is being spent each month. If something is not a necessity, cut it from your expenses completely until you have paid off your debts in full. Then, once you have your debt under control, you can start allocating money in your monthly budget toward fun, non-necessities again.

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