Tuesday, February 27, 2007

How to cut down on spending

Without even looking at my finances I already know that I spend too much money. Specifically, I spend more that I make because I use credit cards for a lot of purchases. That's something that I need to stop doing. In thinking about this, I am wondering how I can cut back on expenses. Loads of articles tell you "easy" ways to save money, which translates as suffering and ludicrous. You will read things like:
  • don't go to Starbucks every morning
  • don't dine out
  • don't have cable tv/internet
  • try to do without a vehicle
  • unplug everything when it is not in use
  • and so on the insanity goes....

Now, it doesn't take a genius to know that drinking a $4 latte daily is a rather expensive habit. It's also rather silly to tell someone that wants to save to punish themselves with no cable/internet/meals out. It's not practical to tell the general population to do without a vehicle. If you're in a city with adequate public transportation, then yes, this point is valid for you, but if you live in Bumfuck, Iowa where there aren't even sidewalks then you might, just might, need a car. And unplugging everything, who has the time man? And how much can that *really* save you? I have my own ideas on how to cut costs.

  • Order water when dining out (soda/tea is $2.19 at Max & Erma's restaurant!)
  • Go to grocery store regularly - a stocked pantry means less need to dine out
  • Get on a regular workout schedule at the gym- working out means feeling better emotionally, thus less emotional dining out. Plus I get a free gym membership through my apartment complex.

On MSN there is a pretty good article on saving using the 60% principle. According to the article, you can really revvvvv up your saving by trying to live off 60% of your income. As someone used to living paycheck-to-paycheck, I can't imagine how this is possible, but I think I shall try it. Once I get another job that is. To utilize the 60% principle you need to figure out what your committed expenses are. The author of the articles lists his as:

  • Basic food and clothing needs.
    Essential household expenses.
    Insurance premiums.
    Charitable contributions.
    All of our bills -- even such non-essentials as our satellite TV service.
    ALL of our taxes.

So, then he suggests taking the leftover 40% of income and dividing it bewteen the following categories:

  1. retirement savings
  2. long-term savings (aka emergency fund)
  3. short-term savings (to be used throught the year for vacations, etc.)
  4. Fun money (monthly 'mad money')

On the author's behalf it is mentioned that this goal might be a bit lofty for most people due to large credit card payments that must be made. It is suggested that using the 20% that would otherwise go to retirement and long-term saving to aggressively pay down debt. Then you can jump up to living off 60% of the income. Suppose you just can't seem to cut this program? Then it might be time to face some facts. You've made some stupid money decisions in the past (yes I have - I'm talkin to you, brand new car in 2005). Could this be you?

  • You have a more expensive home than you can afford.
  • You've committed to car or boat payments that are larger than you can afford.
  • Your children are in a private school that you can't really afford.
  • There's just a big, ugly gap between your income and your lifestyle.

So yes, I have a car that I bought new in 2005 that I really don't need. Monthly payment = $351. Ouch. Current payoff is around $12,000 - $13,000 with interest rate of 10%. Worth of car is around $9,000 - $10,000. Negative equity, what a dirty, dirty thing. Ah, now if I could just perfect time travel to go back and stop myself from that one. Now, I'd love to be able to save up enough to cover the negative equity, find someone to buy it for what it's worth with me paying the negative equity difference and then pay cash for a $4,000-$6,000 car. That right there would free up $351/month. Ah, lessons learned.

Note to self: see what monthly committed expenses are, then find job where I can live on 60% of my income.

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