The three financial challenges, and how to know which one you have

There are three types of financial challenges, and each one has a different solution. Let’s look at which one applies to you.

Clients who work with me are in some form of financial stress, or maybe distress. They have a problem and they want my help solving it, because they have been unable to solve it themselves.

In that respect, financial coaching isn’t that different from therapy or a couples counselor. It’s bringing in help when you need it.

It’s a tremendous responsibility when people come to me, tell me their story, and then in effect say, “well, what do I do?”

There’s as many answers as there are people, and I prefer to work collaboratively rather than stand up on high and dictate what someone needs to do.

But before any work can be done, we need to figure out what the problem actually is. Believe it or not, one’s awareness of a financial situation doesn’t always imbue someone with the ability to see what their challenge really is.

After having done this work for many years, I’ve learned that pretty much everyone’s financial challenges can be summarized by one of three different categories. (Most people have just one, but some have more.) Understanding each of these is key, because the resolution of each of these challenges are very different.

Income challenge

I want to start here not with the most common, but with what people think is the most common. I refer to the “income challenge”.

Stated simply, it’s that you’re not making enough money. More broadly, an income challenge is when the gap between the income one is making and the income one could be making is large.

A family of four in the New Jersey suburbs where the household is making $50,000 a year? That’s an income problem.

A person who’s making 60% of their job category’s median salary? That’s also an income problem.

Income challenges cannot be fixed by saving money; they can only be fixed by making more money. This can be easy or hard, but it’s always possible.

And I should note that an income challenge is rarely the primary issue. More often, the issue is a…

Spending challenge

A spending challenge is when your outgoing money is more—sometimes significantly more—than your income.

I used to think that there were just two challenges: income and spending. But I’ve learned that we need to drill down even farther. And just like I believe that the household budget consists of three classes: Income, Bills, and Expenses, spending challenges are really two different things, with the first being…

Expenses challenge

When you have an expenses challenge, it means that the day-to-day spending of your life is out of balance with the amount of money you take in combined with your other goals.

Expenses are things like groceries, restaurants, home improvements, pet food, gas, miscellaneous spending, and more. They are often not tracked and not counted.

And that’s why this is the most common challenge that people have.

The solution to this is to track your spending, and see where your spending is going. How much are you spending on restaurants? How much are you spending on Amazon? And then you adjust based on what is most important to you.

But not everyone who has a spending challenge has it with expenses. Some have a…

Bills challenge

Remember that the difference between bills and expenses is kind of like the difference between “payments” you make and “purchases” you make. You’d never say you made a rent “purchase” or that you “purchased” your phone bill. Similarly, you’d never say you made a “payment” to DoorDash (unless, of course, you used Buy Now Pay Later).

When you have a bills challenge, you’re signed up for too many recurring payments, or those recurring payments are too large. If you have 25 different subscriptions, that’s a bills challenge. If your mortgage payment is 60% of your take home pay, that’s a bills challenge.

The solution to this is to take a good, hard look at what you’re paying for, and cancel what you don’t need. And for larger payments, you may need to get radical, and maybe sell a car or move to a different place.

These aren’t always palatable choices, but they’re important. If at the end of the month, you’ve spent more than you made, you’ve got a big problem. And even if you don’t spend more than you make, if you don’t have enough money to put away for savings and emergencies, you’re one emergency away from a big problem.

What’s your challenge?

If I were to ask you: do you have an income challenge, a bills challenge, or an expenses challenge, what would you say? Remember that the solution isn’t always just to make more money. Think about it, or ask me and I can help.