Living Below Your Means, Part One

Living Below Your Means, Part One
Knowledge gives you power over money
by Stefani Leto
The average American family walks around lugging $7,000 in annual consumer debt, according to CardTrak. That's a little more than $583 per month in extra money spent, if you want to see it in stark terms. Clearly, most people are living beyond their means.
As a solution, pundits and the popular media suggest living within your means. Heck, it's even suggested that our government adopt this money style. Seems simple enough: you don't spend more money than your household takes in. That's it. It ought to be doable, and it is. But it doesn't go far enough.

You can go on forever living within your means and never gain the security and peace that comes from living below your means.

If you live within your means, you won't add to the mountain of consumer debt faced by most families. Your family will have enough money to pay for life's expenses. This is a good thing, mark my words. But it's not enough. You can go on forever living within your means and never gain the security and peace that comes from a more radical step: living below your means.
Spending less than you receive in income is the key. Easy to say, but hard to do? Maybe. I know everyone isn't an accountant. But if you're committed to a worry-free financial life, you've got to think like one for a few months. Trust me. It's not easy, and it's generally not much fun, unless details are your thing. If you want to end up with a surplus, it's a step that can't be skipped.
Knowledge is power, so they say, and the way to gain knowledge about your family and money is to write down every penny spent by any family member for three months. That's all. No fancy budget formulas, no guilt. Just write it down. This step is difficult simply because of its tedium and because it's not the way it's always been done. Difficulty levels can increase with more family members spending money. A first entry in the spending log might be tiny spiral-bound notebooks and pens for each spender.

Write it down! The proper tools can help, but without agreement among the responsible members of the family, notebooks won't get you very far. In each couple, there's usually one who spearheads each change. Maybe you are the one who wants more financial stability, maybe it's your partner. A minimum of agreement has to exist before living below your means is a possibility.
Some of us need to be shown results before signing on to a program. If you're the one pushing for this change (and it is a big one), take it easy on your partner. Perhaps agreeing that you won't require to-the-penny accounting if your partner tells you the total amount they've spent will be enough to start with. Face it--there's going to be some spending that won't get recorded. You're hoping for a pretty-good compliance rate, not perfection.

So now, it's three months later, and you've done a pretty good job writing down your spending. What you have is a mound of raw data. Next comes a much more fun step. On a piece of paper or your computer financial program (many people like Quicken), roughly list budget categories. In my family, they are divided into income and outgo. Income is any money we receive, whether regular salary or unusual earnings. Outgo gets divided by use. Utility companies, groceries, animal-related costs, clothing for each family member, books, eating out, auto insurance and gas, each of th vjese gets their own line. Your family's budget categories will reflect how you spend money.

Knowledge is power, and detail will make your money picture clearer.

One important bit--don't neglect any budget item now, no matter how small. For instance, you may want to lump cleaning and personal hygiene products under groceries because you get them at the same store. Fine, except remember that they're there. Knowledge is power, and detail will make your money picture clearer.
Run totals. Ideally, your outgo won't exceed your income. In reality, sometimes that's not the case. No matter what your totals look like, you've got a road map to your money future. If you're in the red, do you notice any obvious hot spots? We found that our "miscellaneous" category was using up about $200 a month more than we'd planned. Without record keeping, we didn't know where it was going. Maybe there's something evident on first look, maybe not.

Assuming that increasing your income isn't a real possibility, what do you do to lower your expenses so you aren't spending the limit? I'll cover some ways to do that in the next part of this article. But one last bit of good news: you don't have to spend a lot less than your income to be making progress. Creating any overage at all is an accomplishment to savor.

Living Below Your Means, Part Two:The envelope, please
Living Below Your Means, Part Three: Hatching that nest egg
Lynn's related links:

Contributing Editor Stefani Leto writes and parents in the Bay Area. Mother of an almost-five year old and an infant, she says nothing challenges her mind like parenting. Her work also appears at http://www.windowbox.com and http://www.folksonline.com/folks/ts/1998/pph.html.

Living Below Your Means, Part Two

Living Below Your Means, Part Two
The Envelope, Please
by Stefani Leto
Find prosperity in ordinary envelopes. That's right, if you've gathered the data outlined in part one of this article, you're ready to move your family to a mostly-cash economy. This will almost certainly, if you do nothing else, limit your spending.

Since you've written down everything you spent, you have a good idea of what your expenses are, both fixed and variable. Some costs you cannot lower. Rent, mortgage, car payments, insurance, all these were determined before now. Utilities vary only slightly. Presumably you're doing everything you can to lower them, like keeping thermostats turned low and not running every light in the house.
Beyond fixed costs, however, lies a great area of flux. You know what you have been spending in each category, but now you get to choose. How much do you want to spend? Generally, it's wise to not stray too far from your past patterns. Unless you're facing eviction and dunning notices, you probably don't have to slash costs drastically at first.

Cash Is a Visible Way to Spend
The next part of this system works against our tendency to make transactions invisible. Now that you've established written levels of spending for your categories, you'll need some kind of envelope. This can range from the plain paper kind to specialized resealable plastic currency envelopes. You'll need enough to match your categories. Label an envelope for each category. Into each one, put the amount you've budgeted--in cash.
For many of us, checks, credit card slips, debit cards, all seem like play money. You know it's real money, of course, but it doesn't have the visceral impact of paper and coin. When you pay for an item, really look at the money in your hand. Visualize how long it took to earn. Feel the edges of the coins, crinkle the bills. With this system, you're really spending money when you spend.

To Scissor or Not to Scissor
Should you cut up your credit cards? As with many things in life, it just depends. How much do you "need" them? Can you keep them in your house and not use them? Would you feel safe having a friend or relative hold them for you? There are many financial advice-givers who would have you scissor up your credit cards immediately. For some, that may be the only way to stop using them to spend money you don't have. If you can exercise reasonable control, then I'd suggest merely not carrying credit cards. Unless you have a year's worth of salary in a readily-available form such as a money market account, a credit card might be the thing you need in a real emergency.
Some people who prefer the convenience of a credit card for things like purchases over the internet use their bank debit card. The money comes immediately out of your account, so theoretically you cannot overspend. For the first couple of months on this system, however, I'd suggest that whenever possible use cash.

Reduce Record-Keeping and Guilt
As with any system, the first few months are a time of fine-tuning. If you find yourself stealing from the pets envelope to pay for groceries, then you'll want to reevaluate your amounts. Once you're close to what you'd like to be spending, however, you don't have to write down what you're spending the money on. If money is there, it's available. If not, you don't have it to spend.
Best of all, you don't have to feel guilty for what you spend. Since it's predetermined, you can allow for that Friday latte with friends. You determine what importance various items have. If your family gets great pleasure from dining out, by all means, budget for it.

One possible bonus from this system is the transparency it lends to your budget. Your children, depending on their ages and understanding, can participate in financial decisions. Kids can understand "We agreed that we'd spend $50 a week at the grocery store, and we have. So I don't think we're going to buy candy unless you can find a way to get our groceries for less."
Wheedling treats out of people who seem to have unlimited spending power makes sense. Nipping bits of one's own budget doesn't. Discover the fun of encouraging each other to forego unnecessary purchases. Families can find great unity from identifying a goal, whether it be an item, a vacation, or a house, and saving towards it.

Never lose sight of the real goal. You want to spend less, perhaps significantly less, than what is coming in. Creating an envelope for saving or investing and making that a cash expenditure can make it the priority you want.
Using these envelopes should allow you to notice the places where you can trim costs. Start with a modest goal--spending 5% less on each variable category. Books like Amy Dacyczyn's Tightwad Gazette series are full of tips to squeeze more from your money. Add that amount to your saving envelope each month. If that works, try for 10% or 15%. If you'd like to retire early, you may have to live as much as 25% below your income. Practicing restraint comes more easily with time. Enjoying not having money worries is easy from the start.

Living Below Your Means, Part One: Knowledge gives you power over money
Living Below Your Means, Part Three: Hatching that nest egg


Lynn's related links:


Contributing Editor Stefani Leto writes and parents in the Bay Area. Mother of an almost-five year old and an infant, she says nothing challenges her mind like parenting. Her work also appears at http://www.windowbox.com and http://www.folksonline.com/folks/ts/1998/pph.html.

Living Below Your Means, Part Three

Living Below Your Means, Part Three
How to hatch that nest egg
by Stefani Leto
If you are already living on less than your household income, you're on your way to building financial security for your family. You already know that you can't save anything if it's all getting spent, but maybe you're not quite sure what to do with the extra piling up. Consider this column a quick primer on dealing with the excess you're working so hard to amass.

Just like with cutting expenses, start with the basics. Building up your savings and investments is a step-by-step strategy. Just like a house, start at the bottom with solid footing for the steps which follow.

Your Family Needs an Umbrella
[umbrella graphic] First, build up an emergency fund. Into every family, a little rain must fall. Hopefully, it's of the "The car dropped the transmission" variety rather than health-related emergencies or job losses. Whatever the storm which might befall you, though, having a cushion of savings lessens your potential worry.
General advice is to save approximately three to six month's worth of living expenses in liquid form. A money market account with check-writing capability provides this. Having this buffer fund allows you to focus your concerns on fixing the problem, rather than wondering if you can afford to fix it.

Once you've got that kind of cash as a backup, you can begin considering other means of saving and investing.

Long-Term Saving Can Start at Work
The first kind of investment you will probably want to consider is to make the most of any tax-deferred investment opportunities. This money is generally set aside for retirement. Once you put it into a tax-deferred vehicle, you can't get it out before age 59--without paying a hefty penalty.
There are some exceptions, such as using it for a down payment on a first house or education expenses. That's what makes this a great way to save for your children's education. On the other hand, don't forget that you're responsible for your future security also.
The place to start is anywhere that matches funds. If your work or your spouse's work has a 401(k)-type plan, take advantage of it. If you're self-employed, your options are a SEP-IRA, or SEP-401(k). You should also fund a Roth IRA if you're eligible (this can be used for education, and differs in its tax deferrment). These kinds of accounts won't work for all your investment needs, since there are restrictions when you want to get at your money.

Taking the Plunge Into the Stock Market
You're going to need more available investments. Generally, these are in taxable accounts. If you're new at this money stuff, take a deep breath. This money will go into the stock market.
Over time, nothing else matches the returns you can make by putting your money to work in this way. Unless you're a genius at this (and you wouldn't be reading at this point if you are) this chunk of money should probably be invested in index funds as their tax efficiency is quite good, and their returns are above average.

Secure Your Savings with Insurance
You also need to think about protecting yourself. Life insurance, adequate health insurance, auto insurance, disability insurance, and possibly long-term care insurance, if you're old enough. If caring for elderly parents might be in your future, consider talking with them about long-term insurance. No sense building up savings if they could be wiped out with a single major hospitalization.

This may sound daunting if you've never thought about investing in stocks or using a mutual fund. Talking with a financial professional might help you make some decisions, but use care here. Many "investment advisors" make their money by gathering commissions on funds and stocks they sell. If you choose a "fee-only" advisor, you can be assured that he or she only makes their money by the services they provide. To insure that you're getting as nearly unbiased opinions as possible, you can consider paying them an hourly rate, like an attorney.

No matter where you start, starting is the key. Even if you're only setting aside a fraction of your income to begin with, compounding interest will work for you. Watching your savings and investments grow is a great incentive to save more.

Living Below Your Means, Part One: Knowledge gives you power over money
Living Below Your Means, Part Two: The envelope, please

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Cover of 'Earn More (Sleep Better)'


Contributing Editor Stefani Leto writes and parents in the Bay Area. Mother of an almost-five year old and an infant, she says nothing challenges her mind like parenting. Her work also appears at http://www.windowbox.com and http://www.folksonline.com/folks/ts/1998/pph.html.