The past few weeks we've been talking about the concept of living below your means, why people can have problems doing so, and how to get a handle on where all your money is going. This week we'll look at developing a budget that allows you to pay your bills, put aside a bit for the future and still have something left over for fun.
The Fine Print
The articles in this series do not offer specific financial advice. Instead they will present financial tips, with occasional smart-aleck observations and commentary, that may or may not be useful in the reader's particular situation. You should always seek advice from a professional who is familiar with your specific circumstances before acting on any of the information presented in this series.
It's All in the Name
Many who sit down to develop a budget often feel overwhelmed and don't know where to start. Or they may feel that sticking to a budget means living in a dark, chilly house, dining on tinned soup, and watching the dust settle for entertainment. Visions of the determined 'coupon shopper' come to mind. You know the type: she marches determinedly through the stores, a fistful of coupons and shopping list in hand, and ends up paying about £2 and change for a cartful of day-old bread, tins of cream-of-celery soup, frozen sprouts and a case of artificially-flavoured strawberry-kumquat soda. In short, a budget is often viewed as a form of deprivation, about as much fun as being sent to bed early without your pudding.
So we're going to start by banishing the word 'budget' altogether from our discussion and instead concentrate on developing a 'spending plan'.
Need It, Want It, Gotta Have It
If you did the exercises outlined in last week's article, you should have a pretty good idea of your expenses. You can start your spending plan by dividing your expenses into three categories: things you need, things you want, and 'the future'. 'Things you need' are items you literally can't live without: food and water, clothing, shelter, medical care if you have to pay for it yourself, and transportation. 'Things you want' are all those items that give colour to your life: pets, vacations, hobbies and sports, movies, books and music, gardening supplies and the like. These are the things that feed your soul; they're especially important if you're one of the many for whom a job is merely a way of earning a paycheque, rather than a passion or vocation in itself. Last comes 'the future'. This could mean savings, which gives you stability when you hit one of life's inevitable bad patches, or it could involve paying off existing debt. Whatever, it's an investment in your future.
Next you have to decide how much of your monthly income should go toward each category. One rule-of-thumb I've heard suggests that 50% of your income should be spent on things you need, 30% on things you want and 20% on savings and paying off debt. These percentages are suggestions, though, not hard and fast rules. Depending on your personal circumstances, you may need to adjust the percentages.
What happens if the necessities of life consume your entire paycheque? Are you doomed? Not at all. There is a lot you can do to reduce your basic expenses without sacrificing the quality of your life: buy things on sale and use coupons as much as possible; shop at discount outlet stores or on eBay and similar Web sites; comparison shop if you're planning to buy a large item; plan your shopping to take advantage of sales and to reduce the amount of impulse buying that you do. In addition the Web is full of resources for those who are looking for tips and tricks (see the last section for some of these sites).
Below are some more specific ideas for reducing your expenses. We'll talk more about each in coming weeks.
Tip 1: eat in. It costs a lot less to prepare your own meals than it does to eat out. Doing your own cooking has other advantages as well. You know exactly what you're eating1 and you can avoid all the fat and salt that are common in fast food. Doing your own food preparation needn't take an inordinate amount of time (you can make your own meals just fine without ever turning on the stove, as I can personally attest).
Tip 2: avoid processed and convenience foods. Most of what you're paying for is packaging. Fresh, minimally-processed food is less expensive and is better for you.
Tip 3: raise your own. If you have the space, time and inclination, put in a vegetable garden; you'll get very fresh produce, hopefully raised without a boatload of pesticides. Community gardens are becoming increasingly popular. Groups of neighbours devote a patch of land to growing vegetables and herbs, sharing the labour and the results.
Tip 4: buy in bulk when possible. Foods purchased in large quantities nearly always sell at a lower per-unit cost than foods in smaller packages. If you live alone, consider a joining a food co-op. These groups of people who pool their resources were popular in the US during the 60s and early 70s and allowed individuals to benefit from bulk prices of foods.
Less can be more. Buy fewer, better quality things. For more options, choose a few compatible colours for your wardrobe; that way everything will match everything else. Black is really versatile — you can wear fairly casual, comfortable things but if they're black, you'll look dressy. If you have children, friends and family with other children can be a godsend, since you can exchange clothing as the youngsters grow out of theirs. A personal rule: everything I own must be washable; no dry-cleaning except for winter coats. Dry-cleaning is expensive and it also leaves a residue of noxious chemicals on your clothing2. Another personal rule: buy good footwear. Cheap shoes wear out quickly and can be murder on your feet and back; whatever you save on inexpensive shoes you'll end up spending elsewhere.
For many people, this is the most costly item in their spending plan. Should you rent or buy? This isn't an easy decision and is a discussion for a later time. If you do buy a house, remember that a large house generally means large expenses. In addition, you often pay for the location of that house. Is the location worth it? If you're looking for a safe neighbourhood with good schools or somewhere near your job, then probably yes; if you want snob value, maybe not. There are a lot of little things you can do to economise: switch to compact fluorescent light bulbs; turn down the thermostat a bit in winter and up in summer; caulk and insulate those leaky windows and doors; don't leave the TV running if you're not watching it.
Don't buy new cars. A new car loses about 30% of its value in the first year; that's a lot to pay for that 'new car' smell. Try waiting until the end of the model year when dealers are trying to move inventory to make way for newer models and are willing to deal, or else buy a good-quality used car. If you're lucky, you may not even need a car. European cities generally have wonderful public transportation, something that is definitely lacking in the US unless you live in one of the major cities. If you live close enough to your workplace, walk or ride your bike and get some exercise.
Next week we'll talk some more about the other half of your spending plan, including the fun stuff.
References and More Ideas
Try reading The Millionaire Next Door: The Surprising Secrets of America's Wealthy, by Thomas J. Stanley and William D. Danko. The big secret? The person next door became a millionaire, not by inheriting his wealth or other unusual events, but by consistently living below his means.
Talk to your parents and grandparents; they're a treasure trove of helpful hints. Not only that, you'll also get a real glimpse into life in the last century, a sort of living history lesson that your relatives will be happy to share. My own family includes people who lived through World War II Europe and the Great Depression in the US, people who became experts in essentially living on nothing. (In addition to having an entire cookbook's worth of potato recipes at my disposal, I now know what to do in the event of an air-raid.)
Also check out these Web sites: