Mary Rowland Personal Finance Column—April 2009
Living Smart…on Less
Isn’t everyone today focused on the global economic crisis? Unemployment numbers continue to hit new records with five million Americans unemployed in February. President Obama tells us that we must be prepared to sacrifice, to tighten our belts, to help America turn around and achieve its promise.
But perhaps you are one of the lucky ones. Maybe the economic crisis has not yet touched your family income. Still, you’re probably waiting for the other shoe to drop. What’s the best thing to do? How should you sacrifice?
Well, clearly, if you are flush and debt-free, this is a great time to make a major purchase such as a home or an automobile, because America is on sale. But if you don’t have cash for a down payment, hold off on that. Even those who still hold good jobs should make some preparations for tougher times. So why not take a challenge and live as though you have only one family income?
What’s the downside? If both of you hang on to your jobs through the recession, you’ll have a nice nest egg when the economy turns around. Make plans for what you will do then. You’ll be able to be one of the rebuilders. And if one of you loses a job, your family will have a growing rainy day fund.
Make It a Family Plan
Call a family meeting to announce your plans. The first goal? Ask each family member to stop spending money. Make it a game to see who can go longest without opening a wallet or pocketbook. Everyone takes a bag lunch. Make up a grocery list to be sure you have healthy ingredients for breakfast, dinner and bag lunches. No expresso, dinners out, even movies, for one week. Of course, there will be some small unexpected expenses. Keep track of every check you write, every credit card purchase and how you spend cash from the ATM.
Next, get a handle on your cash flow by collecting a couple of recent paychecks to see how much of your income goes to taxes, 403 (b) and 401 (k) retirement plans, medical benefits and so forth that are deducted straight from your pay. Then write down how much you and your partner bring home each month.
A rule of thumb in budgeting is that your “essentials” spending should account for about 60 percent of your gross, or pretax, income. That includes mortgage payment or rent, insurance, food, utilities, child care, transportation, debt repayment, every dollar you spend that is not negotiable. The other 40 percent should ideally be available for retirement savings, emergency savings, unexpected expenses and discretionary spending. Clearly, this portion of your budget offers a good deal of flexibility, provided you are able to keep the essentials at 60 percent. Go through your checkbook and credit card bills and receipts from the ATM. Make notes on what you spend the cash for.
Your goal should be to reduce monthly expenses as much as possible so that one paycheck could cover them. That means paying down debt and analyzing all discretionary spending including magazine subscriptions, meals out, cell phone bills, cable TV, family entertainment, and dance or tennis lessons. If one partner is laid off, the family will save money on work-related expenses such as child care, transportation, dry cleaning and business clothes. Figure what that might total.
Which items on the discretionary list can you give up? Of course, you could drop everything. But that’s not fair to the family right now because you do have enough money to cover some of these items. Each family member should decide what one thing is so important to him that he wants to hang onto it even if it means getting extra work to pay for it. Calculate how much you would save by eliminating the other discretionary items.
Budgeting By Age
Depending on your stage of life, the decisions you make about the 40 percent of your income that is discretionary may be quite different.
IF YOU ARE in your twenties, you probably use more than 60 percent of your gross salary for necessities. For people just starting out, especially in a large city, housing alone eats up a huge chunk of income. And you may have some debt as well.
Aim to trim the portion of your budget that goes for essentials. Meanwhile, most of the other 40 percent of your income might go for paying down credit card debt and student loans. As you get debts under control, earmark more money for savings.
SUPPOSE YOU ARE in your thirties or forties. You, too, should pay down debt. But also work to get your “essentials” spending down to 50 percent of total income. That would leave you able to squeak by if one of the partners lost his job. The other 40 percent should go into retirement savings, college savings and rainy day savings. You’ll be saving while you can; if necessary, you could drop the savings plans if one of you is out of work.
IF YOU ARE retired or about to retire and your nest egg has taken a big hit in the market decline, you, too, need to make some choices. Do you need to save more? Do you need to work longer? If you can, see a financial planner to figure out where you can cut costs and increase earned income – or unearned income. Or, if you are computer literate, use financial planning software to work out your own budget.
Whatever your age, do not drop medical or life insurance or homeowners’ and auto liability coverage. Failure to carry insurance could wipe you out in the event of a serious accdent. Try negotiating with credit card issuers before you miss a payment. Ask to get the interest rate on your loan reduced. Find out if you can renegotiate your mortgage.
And, although you don’t want to run up debt, it’s not a bad idea to apply for a home equity loan. Don’t touch the credit line. When we climb out of the recession, you will be ready to move forward.
NEA Member Benefits has teamed with the National Foundation for Credit Counseling (NFCC) to provide both free and very affordable financial tools and services to NEA members and their families. For help with budgeting, managing debt, or other financial issues, call the dedicated NEA member line toll free at 866-479-NEA2 (6322) or visit www.debtadvice.org/nea.
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Mary Rowland is a nationally known business and finance writer. The former personal finance columnist for the New York Times and former co-host of a nationally syndicated radio show, Ms. Rowland is the author of several investment books and speaks regularly to consumers and financial planners about investing and personal finance.
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