Wednesday, February 12, 2014

Your Budget: Sweat The Small Stuff? (Part 2)

We ended Part 1 with, "If we are going to explore ways to reduce spending, shouldn't we start with the elements that are costing us the most?"  Let's pick it up there.

Most financial professionals say only 28% of our gross income should be committed to housing costs. Of the average $65,132 gross income, 28% would mean reducing our housing spending from $20,093 to $18,236, saving us $1,857 per year. Assuming a 250-day work year, this savings could allow us to spend nearly $7.50 per day on lunch, enjoying our friends, and taking a break from the office. More dramatically, reducing our mortgage payment by $500 per month, saving us $6,000 per year, pays for a whole lot of dinner and movie date nights.

Similarly, assume we spend $4 per day enjoying our morning coffee at Starbucks with friends five times a week, for 50 weeks a year. Annually this would cost us $1,000. Now suppose we purchase a nice used automobile for $15,000 rather than a new car for $25,000. This saves us $10,000 or 10 years worth of coffee breaks with friends (plus interest!).

Of course, everyone has different priorities. I suggest spending your money on what you are passionate about. For the occasional car fanatic, perhaps spending more on a car that makes you happy each day is preferable to other spending options. Likewise, if homes happen to be your hot spot, heavy spending in this area makes sense. However, I'd suggest that for most people, the experience of constantly eating with friends or spending a night out with your spouse is more likely to bring happiness than the possession of an expensive home or car. After all, would you rather eat out with friends or clip coupons in a large kitchen alone?

Question to the Reader: Where can you cut your expenses most?

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