If you are trying to figure out why you can't make ends meet, or even if you're just trying to get a grip on how you spend your money, there is one indicator you should pay special attention to. I call it the "Confidence Factor." The Confidence Factor is the percent of your household's take-home pay that is spent on the categories of food, housing, and transportation. The lower that number is - the better your chances of avoiding financial difficulty.
The United States Bureau of Labor Statistics (BLS) provides an annual report explaining how consumers spend their money. The information in the report is taken from data or interviews involving over 120 million households. The data for 2008 was released in October, 2009. The average for all the data collected showed 63.7% of take home money going into the three biggest areas of spending - food, housing, and transportation - what I call the three budget boulders.
Over the years, information from the BLS data has been used to manage welfare programs and to manage the criteria for making loans to consumers. This data gets a thorough analysis by different organizations as well as economics specialists trying to better understand why people get into financial difficulty. One thing they have found is a relationship between what I am calling the Confidence Factor and the occurrence of bankruptcies, late payments, and other signs of financial difficulty.
As you might guess, the more money you have obligated to the necessary spending for food, housing, and transportation, the less money you have for other things you need like clothing, healthcare, entertainment, insurance, college savings, retirement savings, and a host of other needs.
There is a magic number when you look at the data. That number is 65%. If your total expenditures for food, housing and transportation require less than 65% of your take home pay (That would be what's left of any income after taxes and mandatory fees for Medicare, employee parking, etc. have been taken out.) you fall into a category of people who seldom have financial difficulty. And since the average for 2008 was 63.7%, according to the BLS data, we would expect most households to be in fairly decent financial condition as far as paying the day-to-day bills.
You might not think about the 65% as being such a critical number until you consider what you still need to do with the remaining $35 out of every $100 you bring home. The BLS categorizes the remaining spending categories as apparel, healthcare, entertainment, personal insurance and pensions, and "other." You might recognize these categories as the areas where you have some choice about how you spend your money. Actually, you have choices about food, housing and transportation, too. But once you make those choices, they are difficult to change because that change would involve a major disruption in your lifestyle - relocating, downsizing to a smaller house, buying a cheaper car. Yet those few decisions you make about where you live will determine how much your house costs, how much you pay for utilities, maintenance, insurance, and taxes, how far you have to travel to get to work, schools, and shopping, and whether you must buy a car to get around.
Once you have accepted your lifestyle you must then find a way to pay all the day-to-day expenses with the money you bring home. Even if you spend only 65% on the three budget boulders of food, housing, and transportation, you are still left with only $0.35 out of every dollar you bring home to pay off your credit cards, save for retirement and college for the kids, and spend on vacations, clothing, healthcare, gifts, and entertainment.
The problem comes when you have obligated yourself to spend more than 65% of your take-home pay for food, housing, and transportation. When you do that, you cannot be so confident that you can cover all your other expenses with the money that is left. Data shows a significant increase in financial difficulty for households that spend more than 70% of their take-home pay on food, housing, and transportation. Having less than $0.30 out of every dollar you bring home to pay for everything else is not enough money to make ends meet.
The biggest change you can make in your spending comes from changing the areas where you spend the most money. So, how can you decrease what you spend on food, housing, and transportation?
To reduce food costs:
Avoid dining out. Prepare your own food.
Avoid pre-packed and pre-sliced foods. Buy food in bulk quantities, and whole vegetables and fruit.
Avoid single portion sizes and pre-assembled dishes. You're paying for that convenience.
Brown-bag it. Not only will this help you control costs, but you will have more control over how much you are eating, too.
Shop smart. Use coupons. Be aware of sales.
To reduce housing costs:
Before you think about moving to a smaller home, review your household insurance policy to see how much money you can save by increasing the deductible amount. Shop around to find the insurance companies that reward good credit scores with lower premiums, or that don't penalize you if you have a bad score.
Don't make improvements to your house if you can't afford them. This includes new furnishings.
Adjust the thermostat so your furnace and air conditioning don't work so hard. Having a warmer house in winter and a cooler house in summer costs money.
Reduce electricity usage. Don't leave lights or TV on when you don't need them.
Do your own house and yard maintenance if you can.
Refinance your mortgage; ask if you can get rid of PMI premiums if you have them.
To reduce transportation costs:
How many cars do you really need? If you sell one of your cars, you will not only get money for it, but you will also reduce your insurance and maintenance costs.
Are you making car payments for a car that is more for show than for transportation? Consider trading down.
When you shop for a car, talk with your insurance carrier to get a comparison of insurance costs for different models you are willing to consider.
Use your car(s) only when necessary. Combine trips to the store. Don't "tour" without a purpose.
Use regular gas unless your owner's manual tells you otherwise.
Review your insurance. Increasing your deductible amount will save you money.
Obey traffic laws. This will avoid the cost of citations, and will improve the chances of avoiding accidents. (Accidents cost money.)
Maintain your car and keep it as long as possible. You don't need a new car every 2 or 3 years.
Buy - don't lease.
So? How much of your take-home pay do you spend on food, housing, and transportation? How will you give yourself a better chance to make ends meet? Study your spending habits to determine how much you spend on the three major budget boulders and make plans for getting it down to less than $65 for every $100 you bring home. Doing this will build your confidence.
James W. Stone, has been involved in new product development and marketing for most of his working career. Jim has a degree in Mechanical Engineering, and an MBA. His current interests focus on the psychology and sociology that influence our daily decisions when we spend money.
Much of this is covered in his book "Spend Joyfully!" http://www.spendjoyfully.com
Read more of Jim's articles at http://www.jameswstone.com
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