How much money can you really afford to spend?
Image source: Steven Depolo
Does it always seem like you're just scraping by? Do you run out of money a day (or two) before your paycheck is due? Are you always stressed and having to do last minute expense juggling? If you're experiencing any – or all – of these on a regular basis, you're not alone. This can be doubly confusing and stressful if you're earning a decent, steady wage yet the money never seems to go far enough to take care of your expenses. Even households with two income earners struggle to pay their bills, much less to have money to save for retirement or as an emergency buffer.
Today we offer you some tips to try and ease your money woes:
#1 Reconsider where you live
Many Americans are “house poor” meaning that they have a nice home but it takes up so much of their income that it makes them poor in other aspects. This can make you feel like you're living in an attractive financial prison. As a rule of thumb, your housing costs (house payment plus real estate taxes, homeowner's insurance, utilities and other costs associated with the home) should not exceed 25% of your gross monthly income. If you're paying more than this, you may need to reconsider where you live and try to get out from under an unaffordable house payment and move into more modest accommodations.
#2 Evaluate where you stand
You need to know if you're in immediate danger of everything going belly up. If you or your spouse lost your job or missed a week of pay, would everything come crashing down? What if your car broke down? What if your power bill is more than you expected? Do you have an emergency fund to cover this? If not, you are greatly at risk and knowing that you have no cushion can make your life even more stressful. Figure out how much of a safety net will give you peace of mind and trim expenses where you can to build it up ASAP so you can weather a minor incident if it crops up.
#3 Reconsider what you drive
Just as you can be house poor, you can be car poor. Many people always buy a new car as soon as their last car is paid off so that they always have a car note. And plenty of families have two car notes which is double trouble. Consider cutting back on your car costs ASAP. If you have a car loan that's almost paid off, instead of buying a new car, tuck that car payment money into the bank to pay for repairs or buy a solid used car if your current car poops out on you. Also consider consolidating down to one car if possible and ride share. At a minimum, you should never have more than one car note at a time.
#4 Don't credit spend
Credit spending is what happens whenever you swipe your credit card and you can't afford to pay it off in full that month. Essentially, you are taking out a loan when you do this – and it's a high interest loan. Credit cards should either be paid off in full each month or not used at all. The only time you really need a credit card is when you're renting a car. Otherwise, use your debit card or spend cash to keep your spending in line with what you can afford. Check out our recent blog on using the envelope system to get your budget under control.
#5 Know what you can afford
Think about what you can afford to spend not as a specific dollar amount but as a percentage of your income. As your income increases, you don't need to increase your spending, but if you do, you should keep it in line with recommended maximums. Here's what you should spend on each of these major budget categories:
- Savings – You should put away at least 10% of your income into retirement or other long-term savings.
- Emergency fund – You should put away at least 5% of your income into a fund to cover unexpected expenses.
- Housing – You should spend no more than 25% of your income on mortgage/rent, utilities, homeowner's insurance and association fees, maintenance and lawn care).
- Transportation – You should spend no more than 10% on your car payments, car insurance, gas, repairs and tolls.
- Disposable income – You should spend no more than 25% on food, clothes, eating out, entertainment, toys, vacations, school supplies and all of the other costs that life throws at you that don't fall into one of the above categories.
- Taxes - The other 25% is to cover your taxes including your 7.5% FICA and Medicare withholding from your pay, your federal and state income taxes. If your taxes total more than this, that means you need to cut back on your expenses (not your savings).
If you are unable to stick to these guidelines, that means your expenses are out of whack and it can be hard to adjust without assistance. For instance, if you've got a mountain of credit card debt you can only afford the minimum payment on, are upside down on your mortgage or car loan, have medical bills and other expenses you just can't service, getting a clean slate can help you recover and get on a budget.
If you're looking for help, a North Carolina bankruptcy may be the financial fresh start you need. Contact the law offices of John T Orcutt for a free consultation today.