Cutting Expenses Only Gets You So Far

Dollar SignAs I was reading posts from around the blogosphere yesterday, I came across an interesting statement on a review at Paid Twice. The author writes, “This is more than willpower for me, it is an actual lack of available funds, no matter how much I cut our expenses.”

As I’ve already shared on this blog, there are three steps to getting out of debt. First, you stop spending. Then you cut expenses. Last, but certainly not least, you increase your income.

Cutting expenses is a critical step. You have to get where you are spending less than you earn. But cutting expenses only gets you so far. You’ll never pay off debt quickly by merely cutting expenses.

Let’s say you owe $30,000 in credit cards, student loans, and car loans. And let’s say you cut your expenses and free up an extra $75 a month to pay down your debt. How long will it take to pay back your debts with that extra money?

I can’t give an exact number because interest rates are different for everybody. Let’s just say it will take a really long time. Probably 5-10 years and maybe even longer.

On the flip side, what if you increased your income by $500 a month and used 100% of it to pay down debt? How much faster would you become debt free?

Here’s the bottom line: There is a limit to how much you can reduce your expenses. But there is no limit to how much you can earn. This is why you must not only focus on reducing expenses, but also on making more money.

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2 thoughts on “Cutting Expenses Only Gets You So Far”

  1. There is no limit to how much you can earn is probably true in theory, but if it was true in practice the whole world could be multi-millionaires ;). There are always other factors to consider. is it because people are too “comfortable” with the lot they hold already? Maybe, and probably. but sometimes there are other factors (ie – supporting family members that can’t support themselves) that have to be taken into account before a risk is taken with trying to change one’s income for the better.

    Not that I don’t think making more money is a good thing. But you’d be surprised how much small amounts of extra money consistently paid can affect debt over the long term. Truly ;)

    We still have a three year time horizon to deal with a bit north of $30,000 in debt. Hopefully :)

  2. Point well taken, especially about the power of small payments made consistently. Small amounts applied to debt consistently probably have greater effect than large amounts applied only periodically.

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