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| Wednesday, September 27, 2006 |
| Keeping those fixed expenses as low as they can go... |
I am a big believer in spending less than you earn. When I first confronted my debt in my early 20's and realized I needed to bail myself out, I was forced to spend less and earn a lot more. As time passed and I made progress on the debt front, I increased my savings instead of increasing my lifestyle. It took years of hard work to learn to live beneath my means.
Knowing all that, it should not come as a surprise that in the latest Liz Pulliam Weston MSN article: 7 roads to financial ruin (I know, cheery title huh?) the road that interested me the most was: Letting fixed-living costs swell
If you've cut your spending to the bone and are still struggling, maybe you need to take a closer look at the bones -- that is, your basic living expenses.
Poster Alee, for example, has a mortgage payment of just $550 a month. But combine that with her monthly utility bill of $300, and she's already spent 60% of her $1,400 a month in take-home pay -- and that's before paying for groceries, gas and other necessities. Even if she didn't have $12,000 in credit card debt to finance, Alee's spending would be out of balance, according to Elizabeth Warren, a Harvard University bankruptcy expert and co-author of the personal finance book, "All Your Worth."
Warren recommends people's "must have" expenses total no more than 50% of their after-tax income. (Your after-tax income is basically your take-home pay, with any non-tax deductions like 401(k) contributions and health insurance premiums added back in.)
"Must haves" typically include:
Mortgage or rent
Utilities (including phone and television)
Transportation (gas, car payment, car insurance)
Other insurance (life, health, property, disability)
Groceries
Child care
Minimum loan payments
Child support or other court-mandated payments
Once you've trimmed the easier stuff, like utilities and groceries, you come to more agonizing decisions, such as finding cheaper child care, opting for less expensive housing or taking in a roommate. Alternatively, Warren said, you can look for ways to boost your income.
Either way, hard choices and extra effort may be required to get yourself on track. But a budget that seriously out of balance can't be sustained, and eventually will lead to financial ruin. Being the financial neurotic that I am I found myself whipping out my handy excel spreadsheet and quickly plugging in some numbers. I love taking tests that I know I can win! As I suspected, I did "win", my must-have expenses take just 45.61% of my total take-home pay. But then I kind of knew I would do well on this one, since I have focused on keeping my fixed expenses low for years.
But what about others out there? What is your percentage? Don't forget to add your 401(k) contributions back into your take-home pay number (the first time I did the calculation I forgot that part and my number was over 51%). |
| posted by Boston Gal @ 1:21 PM *
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| 18 Comments: |
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For me, rent + utilities are 17% of after-tax take-home pay per month. I am single with no kids, live 20 miles south of San Francisco, and share a huge house with 4 other people. Spliiting the rent and utilities 5 ways saves me.
I hope that after living in this situation for a while longer, I'll have grown my net worth and short-term savings enough to move out and get a place of my own in the bay area (rent or buy, depending on which is more cost-effective).
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All Your Worth gets my vote for best general personal finance guide out there. I want to buy it and give it to everyone.
I, however, am WAY off from the target. My must-haves are at 67%. But it used to be worse, and as I pay down my student loans, it will get better.
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Ack, mine is at 64%. But that's mostly out of whack because of the rental property. (Which I'm selling.)
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I'm sitting at about 60%.
I am living the first paragraph of this post.
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Hmm, mine is about 47.5% with the 401k included and about 53% without.
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I'm at 35.35%. I save some money by having my car paid off and dividing my utilities between me and my fiance. Our total picture would probably look better as she earns more than I do.
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Ow.. this exercise hurt. No pain, no gain doesn't apply here. I contribute the max to Roth 401K and Roth IRA. My two luxuries are my in home childcare/babysitter and pre-school. Without those two categories my expenses are 64%.
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I guess we all live pretty close to the wire. I am at 47% until I factor in childcare for two under five-yr-olds which will put me at 63%. Thankfully, these costs are transitory!
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Wow, I am impressed with the numbers! It must be harder to stay under the 50% number at different points in your life. I know when I was just out of college and starting my first job I was spending a large percentage of my paycheck on my "must-haves". I would imagine parents with young children would be another group who hit the high percentages (good thing babies are so cute - because they are EXPENSIVE) I wonder if there are any other life stages that can cause your percentage to climb?
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Must have's (mostly mortgage, r.e. taxes, misc. insurances, and 401K contribution),are about 68% of after-tax take-home salary. However, YE bonuses, stk options, etc are big offseting factors - that is where savings and fun money come from.
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I'm at about 30% based on a rough guess for the grocery category.
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Mine comes in at 41% and most of that is mortgage and property taxes. If I could have the house paid off (wishful thinking) it would go down to 23%. Of course 2/3 of each mortgage payment goes towards principle, so I'm not complaining too much.
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new address of the 7 roads to financial ruin article:
http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/7WaysToCommitFinancialSuicide.aspx
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Dollface, just wanted to say I'm proud of you for spreading the word about living on less than you make. Good luck on deep-sixing your debt (if you haven't already). Here's looking at you, kid. www.debtective.com
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I too live in boston. I am single with no kids and share an apartment with roommates. My must have expenses sum upto 32% and my total expenses sum upto 40% of my after tax income. It is really difficult some times to stay on the saving path. I do tend to skew this ratio sometimes, but I have been following this since my first job.
--SummerBoy
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Ha, mine are about 90%, soon to be over 100% (I lost my job while I should be getting another one soon, I'm expecting a $20-$30K paycut, and it has been hard enough as is). My graduate student loan payments- for a degree that will never earn as much as it cost- are $650/month. I don't have roommates because I don't want to move into a stranger's home, and I can't afford to get a 2 bedroom and hope I find a good roommate before the first month's rent is due. I refuse to live without basic cable. Other than that I never spend money, in fact, I refuse to turn on the heat and just sit around freezing. I have just resigned myself to the fact that I will never make enough money to live on. Most people who work in my field are married because it requires enormous amounts of education but pays nothing.
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rent+utilities are 15% of my net income. I rent a hge 1 bedroom apartment. I live in Houston by the way.
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For my wife and myself, we spend about 20% of our aftertax income on eating and keeping a roof over our heads (mortgage, utilities, maintenance, groceries, etc.).
Car is paid for, maintence plus fuel plus insurance and so forth come to maybe 6% of our aftertax income.
We're fortunate enough to have excellent medical and dental coverage so our copayments last year were maybe 3% of our aftertax income.
All of above adds up to 29% so even if I'm forgetting other essentials our must-haves ratio comes to well under 50%.
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For me, rent + utilities are 17% of after-tax take-home pay per month. I am single with no kids, live 20 miles south of San Francisco, and share a huge house with 4 other people. Spliiting the rent and utilities 5 ways saves me.
I hope that after living in this situation for a while longer, I'll have grown my net worth and short-term savings enough to move out and get a place of my own in the bay area (rent or buy, depending on which is more cost-effective).