Living on Less – With a Plan
Everyone’s cutting back on expenses because of the economy. However, doing so out of offer is a weak plan. Instead, do so strategically with an eye on your family’s ﬁnancial health by examining your ﬁnances and trimming expenses that make sense.
America received a wake-up call in the final quarter of 2008 when the National Bureau of Economic Research made it official: America is in a recession. The announcement confirmed what many already knew and consumers from coast to coast cut back their spending dramatically. The shift from frivolous spending to a new frugality has had a profound impact on the economy and has many Americans bracing for even more bad news. Falling home values, shrinking retirement accounts, and disappearing jobs are forcing consumers from all income levels to live on less.
Living on less isn't necessarily a bad thing for you or for the economy's long-term health when approached with a plan. Prioritizing where the money you have goes will give you more stability. When the economy recovers, you'll be more inclined to continue spending your money wisely instead of frivolously.
Wants versus Needs
First, recognize the difference between what you want and what you need. You may want a leather jacket, but what you really need is warmth. You may want a brand new hybrid car (so you can save money on gas), but what you really need is economical transportation. In either case, you'll pay a premium for indulging in your wants rather than considering your needs.
Determine Your Monthly Net Income
How much money comes in each month after taxes? Always look at your take-home pay, not your salary. For example, if you make $60,000 per year, that's $5,000 per month before taxes and other deductions, but what actually makes it to your bank account? After taxes and deductions, your net income will be much lower, perhaps $3,000 per month or $36,000 per year.
Get in the habit of thinking of your income from the "take-home pay" perspective. Doing so lowers your perception of how much you earn. Instead of using the “I make $60,000 per year, I can afford it" mentality, use a humbler approach. You really only receive $36,000 each year. Maybe you can't afford it after all.
Next, evaluate your living expenses. Go through the last few bank statements and look at your spending. Use a spreadsheet and list your monthly expenses for the following categories:
- Housing (mortgage or rent, property taxes, insurance, homeowners' association fees, utilities, etc.)
- Transportation (car payments, insurance, fuel costs, regular maintenance, car washes, etc.)
- Debt payments other than home or car loans (credit cards, student loans, personal loans, etc.)
- Savings (long and short-term contributions to any savings plan)
- Food (groceries, dining out, school lunches, coffee, etc.)
- Everything else (clothing, subscriptions, out-of-pocket health care, travel, entertainment, etc.)
Tallying your expenses reveals exactly where your money may be trimmed. Let's take it a step further and calculate the percentage of your net income that each category represents. Ideally, the percentages should break down as follows:
- Housing - 35%
- Transportation 15%
- Debt payments 15%
- Savings 10%
- Food and everything else combined 25%
How did your living expenses break down?
Tackle each category one at a time, looking for ways that you can scale back expenses or reallocate spending. For example, if your housing expenses are gobbling up 50% of your monthly net income, look at each expense with an eye on reducing it.
Can you have your home reassessed for property tax purposes now that the value has fallen?
Can you raise your insurance deductible in exchange for a lower premium?
Now, look at your transportation costs. I sit time to trade that gas-guzzling SUV in?
Does your family really need two cars?
Check into alternative transportation options such as vanpools and public transit. Combine errands and stay closer to home. Call your insurance agent and raise your deductible or ask about available discounts.
What about your other expenses?
How much are you spending on meals?
Which expenses are frivolous?
Do you really need movie rentals or would it be cheaper to watch movies at home?