Step 3 – Balance Income and Expenses

As you think about what was spent in each of the categories and plan how much to spend now, ask these questions:

1. Which expenses are essential to your family’s well-being?
2. Which expenses have the highest priority?
3. Which areas can be reduced to keep your family’s spending within its income?
4. How much can be afforded in each category?
   

Subtract total monthly expenses from total monthly income. The result is the amount that is “extra” or must be “cut” from expenses. If cuts are necessary, adjust the amounts you plan to spend in each expense category.

   
Add up the revised expenses and compare the total to current income. You may discover you don’t have enough projected income to cover current fixed obligations, or to pay necessary living expenses. If this is the case, some difficult decisions must be made. What can be done if expenses are greater than income?

• Increase income. What are the possibilities for part-time or temporary work to help supplement income. Can other family members seek employment?
  

• Cut spending. You may be able to cut back on utilities, food, gasoline, clothing, recreation, contributions or gifts. USDA has low cost menus and other resources that help families reduce expenses (http://www.cnpp.usda.gov/USDAFoodCost-Home.htm).
  

• Reduce your fixed expenses. If too much income is going to fixed expenses, such as housing or debt payments, there may not be enough money left to cover your other living expenses. This dilemma may make it necessary to refinance loans, move to lower-cost housing, or sell the property to reduce fixed expenses. 
  

• Look at other assets. What savings, investments or property could be used or converted to cash to meet expenses?
  

What can be done if income is greater than expenses? Allocate the extra dollars to savings for future short-term and long-term goals (education, buying a home, retirement).