Hidden Treasure in Your Household Budget, Where to Find It
It is often recurring expenses that can be better managed to achieve
Month by month, I meet with clients seeking a golden goose. That is, the one investment that will make their retirement dreams come true. Just as important to investment choices, however, is the process by which we accumulate savings, to invest.
Buying a single high growth stock or fund for a Roth IRA account may seem just the thing. The trick is to first accumulate the cash to fund the account that will make the purchase. And, of course, allowing for normal market volatility, investors need to make a number of purchase in different investments, to diversify the risk.
So how to get there? Here are some tips based on my years of sleuthing personal budgets for the extra cash. Check out some of these ideas, to free up your own $400 monthly or more. You may not have to clip monthly supermarket coupons to get there.
Check carefully though your monthly bank and credit card statements, for any subscription type expenditures related to possibly unnecessary services. These might include membership charges for a one time visit to a website, insurance for identity theft protection, product warranties, job loss insurance, and upgrades or renewals for installed software. Unchecked, these can add up to hundreds of dollars a year in silent fees deducted from your accounts.
Insuring your life, as well as auto and home is most usually very necessary. However, insurance is also one of the biggest ticket items in a household budget after mortgages, and property tax, or rent. It pays to shop around. For instance, when shopping for life insurance, check first with companies that issue life insurance and annuities as their primary product lines. These companies may offer a lower premium cost than those that insure primarily personal and real property. If your health has improved, or if you can lose 10 pounds and reapply for consideration, consider checking around for a new quote. By the way, carry your own life insurance in addition to that offered by employers. You want to be covered while between jobs, such as when you change employers or are unexpectedly laid off.
If you have no dependents and no one depends on you for income or to share in paying for jointly incurred debt, then the life insurance may be optional. Remember, your estate will still be liable for your debt when you pass away. The life insurance proceeds can pay this off.
Mental health expenditures
Almost every budget that I review has what I call ‘mental health’ type expenditures. These might be as simple as a daily coffee latte or as complex as a $200 or more monthly purchase of new software, photography or outdoors equipment, or payments to a house cleaner. Couples sometimes allot each other their share of these types of expenditures. Problems arise if the incoming cash flow cannot support all of these outflows or if new goals can’t be funded without trimming some of this discretionary expense back.
That said, a certain amount of ‘mental health’ spend is wise to maintain a healthy relationship, in a couple, and to release frustrations in a positive way. I work with my clients to cut or substitute less costly releases for life’s tensions.
Winter electric and gas bills can be particularly vexing, as they can upset the best laid plans for a monthly budget. Check over your historic electric and power usage to see what patterns emerge. Consider changing over to water or electricity saving appliances to cut consumption. In water rationed areas you might even explore possibilities for recycling greywater, if local health authorities make this option available to you. The average washing machine can use 40 gallons or more in doing one load of clothes. A high efficiency machine can ratchet this usage down to 12 gallons, and less power to do the same load. Once cooled, washwater can be pumped into ornamental areas of your garden or irrigate certain types of edible crops. Special detergent is required. Check with your local water department or see http://www.greywateraction.org for more details.
For most families and couples, the weekly trip to the supermarket has been supplanted by weekly trips to 2 or 3 markets, including the local Farmers Market stalls. Without careful meal planning, food purchases can outpace actual consumption, resulting in a lot of food waste. Added to expenditures for meals out, a food budget can easily balloon in a busy month, particularly when families are juggling two careers and childrens’ after school activities. There are no quick fixes for this problem other than one old standby, the food budget cookie jar. In this scenario, food purchases would be budgeted and paid for with cash. The cash available is in the cookie jar. When there is no more money, you know you have exceeded the budget for food. This is not a suggestion necessarily to sacrifice eating for the remainder of the month. Rather, it is an exercise in heightening awareness of what you are actually spending so you can make some intelligent choices about what to cut back. Or how to buy what you need without incurring spoilage.
To better control spending, it’s important to map what you currently do. There are great interactive templates for this purposed available on the Internet. I can share one such template with you, which came from http://www.feedthepig.org, published by the American Institute of CPAs. Using such a template will not only show you how much you spend for any routine item, but also allow you to compute ratios, to see what percentage of your current budget may be spent on variable vs. fixed costs, and what percentage may be devoted to routine costs like food, housing, insurance, and vehicle expenses.
Ideally your PITI ratio, that is, your ratio of principal, interest, taxes and insurance to gross income, would be 28 percent or less. Your total debt payments to income ratio would be less than 36 percent. If you exceed these ratios, it’s time to review whether to carry a car loan or whether to simply buy a car outright, perhaps an older model that is less costly to insure. It also pays to review your general use of credit cards to cover non emergency expenses. Ideally, you would minimize the use of such cards, because of the interest liability their use incurs.
Using all of these tips combined should help you find extra cash to devote to your savings goals. Consider building up your emergency savings to avoid use of credit cards. If you haven’t already started a Roth IRA for yourself or your spouse, or a college savings fund for your child, consider repurposing your new found treasure to fund these goals. I am always available to help you reboot to make your dreams happen, hopefully faster. Your overarching goal should be to fund retirement and for this, you will need to set aside 10-20% typically of what you earn throughout your lifetime. This assumes that you retire at age 65, and start saving no later than your 40s. If you are already older then the percentage to be saved can be much higher.
By the way, the ability to save is an essential life skill. Pass these tips on to others.