When You Make Decent Money But Can't Pay Your Bills

Diagnosing What Makes Your Financial Life Harder Than It Needs to Be

Couple sitting on sofa working with paperwork and laptop to balance their budget
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It can happen to anyone. You have a great job, you’re coasting along nicely, and then just when you least expect it, something happens to alter your once-stable financial situation. Maybe it's illness, a divorce, or even a little fiscal mismanagement on your part. You have a decent salary, but suddenly you can’t pay all your bills.

As of 2017, it was estimated that nearly eight out of 10 American households were living paycheck to paycheck, regardless of how much they earned. If you find yourself in that 80%, you don’t have to throw in the towel. In fact, you have options for how to get your finances under control again.

Start by identifying exactly where your cash is going—all of it. This goes beyond just itemizing your regular monthly bills. Include those on-the-go coffees and trips to the convenient store, because when you see all of your expenses totaled together, you may be able to pinpoint your spending soft spot. Next, it’s time to start considering the following concepts. 

Are You House Poor?

The first step is to identify what you’re spending more on than anything else. Chances are, it’s your mortgage and/or your overall home expenses.

Consumers often take on more house than they can afford to maintain, and this could be the root cause of your money problems. Maybe it was that extra bedroom you thought you really needed to have, or the expansive backyard that was to die for. Your income might be sufficient to cover the mortgage payment, but is it enough to also accommodate utilities, property taxes, maintenance expenses, and insurance? If not, you might be “house poor.”

Homeownership is the American dream, but it’s generally recommended that you invest no more than 2.5 times your annual income into the purchase price, and that your monthly mortgage payment be no more than 28% of your gross monthly income before you pay taxes.  

Depending on how much cash you put down when you purchased your home and how much equity you’ve built up, you might consider refinancing. This could reduce your mortgage payment, either through a lower interest rate or because you’re spreading 15 years’ worth of payments over 30 years. The amount of money you can save depends on total refinancing costs, the effects of refinancing on taxes, and whether you plan to sell your home in the near future.  

Refinancing over a longer term is often just a temporary fix because you’ll end up paying more in interest over the life of the loan.

Do You Have Too Much Debt?

Another common culprit behind financial instability is the overall amount of debt you’re servicing each month. It’s easy to start inching over an acceptable and manageable threshold without even realizing it.

Do an easy check on your indebtedness by calculating your debt-to-income ratio (DTI). Begin by totaling all the bills that you pay monthly, including things like insurance, student loans, or credit cards, then divide this number by your gross monthly income—what you earn before taxes are withheld. The resulting number is your DTI. 

Most lenders want to see a DTI ratio in the area of 35%. While some can be more forgiving, anything over 43% is generally considered gulp-worthy. Our loan calculator can help you identify the long-term cost of each loan and credit card, offering some guidance:

If you find you have too much debt, cutting expenses on things you may not need—like that daily coffee run—may be key. 

Do You Have Spending Issues?

Maybe your DTI is reasonable, but you nonetheless find yourself running out of money before month’s end. Your problem might be that you have spending issues. Maybe you just have a hard time saying no to yourself. Here are a few telltale signs:

  • Your credit card balances add up to 80% or more of your credit limits.
  • Your total credit card payments are more than your monthly mortgage payment.
  • You regularly have to use your credit cards for expenses like groceries or gasoline because you’re out of cash or money in your debit card until payday.

Get into the habit of noting every single dime you spend each day on anything that’s not an essential living expense. Those coffees you’ve been buying on the go are not essential, nor are shopping sprees, happy hours, sporting events, or anything else that just makes you smile.

Some experts recommend keeping an ongoing record in your phone, or even on a piece of paper kept in your purse or pocket. The point is to create a record of everything you spend that you don’t really have to spend, and develop a budget accordingly. 

Pay particular attention to your spending habits in the hours and days right after payday. Retailers tend to target these times by creating deals that lure in shoppers, and you might be falling victim.

The idea here isn’t necessarily to deprive yourself and make yourself miserable, but rather to not add to your financial stress. You just want to pin down where your money is going so you can take steps to control your spending. Allot a specified number of dollars per month for fun stuff—then discipline yourself to stop there. 

Are Your Tax Withholdings Correct?

Withholding is the amount of income tax your employer pays from your paycheck to the IRS on your behalf. With changes to the tax law (and your own lifestyle, i.e. starting a family or moving homes) occurring often, it’s important to perform what the IRS calls a “paycheck checkup” to ensure you have the correct amount of tax withheld from your paycheck.

In order to figure out if your tax withholdings are correct, begin by taking a look at your gross income. Are you having too much in the way of taxes withheld from your paychecks?

The answer is most likely yes if you receive a large tax refund each year from the IRS. You’ve effectively given the IRS more money than you had to, and the IRS kindly returned that money to you after holding on to it all year—without interest.

The Tax Foundation quotes the U.S. Treasury as estimating that 75% of taxpayers have more taxes than necessary withheld from their paychecks, only to receive that money back interest-free after the close of the year.

Receiving the appropriate tax withholding is relatively easy once you’ve pinpointed the fix. The IRS offers a tax withholding estimator online. Plug in your information and it will tell you if you’re having more withheld from your pay than is necessary. The calculator will also guide you through redoing your Form W-4 for your employer to rectify the situation, ultimately leaving you with more take-home pay to meet your monthly expenses.

The Bottom Line

Once you’ve identified where your money problems come from, it’s time to take the necessary steps to fix them. 

  • Consider consolidating your credit card balances: If credit card debt is where the bulk of your issues lie, you may want to consolidate your balances onto that one card with the lowest interest rate. Just keep in mind that many cards offer a low introductory rate for a specified period of time, then they hike it up. Your goal is to pay off those balances to the greatest extent possible during the low-interest period.
  • Consider talking with a credit counselor: If discipline just isn’t your strong suit, a credit counselor may be able to help you create a budget you can live with, and give you some tips for sticking to it. You can usually find reputable credit counseling services through credit unions, universities, financial institutions, and consumer protection agencies. Look for one that’s accredited by either the National Foundation for Credit Counseling or the Financial Counseling Association of America. 
  • Always pay your bills first, even if they aren’t due yet: If your bills are paid right away, you’re less likely to have the money to overspend, which will enable you to get back on your feet financially. One trick is to divide your must-pay bills by the number of paychecks you receive each month. Even if they’re not technically due yet, service them first so you can only spend what’s left over on nonnecessities.
  • Consider reaching out to the companies and lenders you owe: Sometimes, asking for help is worth it. Many companies and lenders are willing to work with you while you get on your feet again, particularly during times of national crisis, as they may have implemented special payment flexibilities for those experiencing hardship.