Is Your Budget Penny Wise and Pound Foolish?

October 12, 2012

I talk to a lot of people about their cash flow, budgeting, and debt and when we dive into the details of their monthly cash flow, we tend to look for relatively easy ways to trim spending.  We will look at things like keeping vs. ditching a land line, cutting back on the premium movie channels, and cooking more and going out to eat less.  These are all worthy pursuits and can all lower your monthly cash outflow for years to come.  But I’ll put them in the “micro” budgeting category.  Micro budgeting can save money, for sure.  But is it possible to make an even bigger impact on your budget? 

I think so!  And that would fall into the category of “macro” budgeting. (I knew that my micro & macro economics classes in college would pay off some day). By macro budgeting, I’m talking about the biggest items in your budget.  Usually, that’s housing & transportation.

When I talk to people about their budgets, their housing cost is almost never a topic that they’re willing to discuss.   People get attached to their homes, even if that home is creating a financially draining effect on their budget.  Having a non-negotiable item in your budget, especially if it’s the largest item in your budget, probably isn’t the best course of action if you are struggling to make ends meet.  It may not be what you want to do and it may be one of the hardest decisions you’ll face, but if you are having trouble making progress, financially tackling your biggest budget item is a great place to start.

What can you do?   If you own a home, maybe you rent out a room to a student, a flight attendant or someone who travels to your city for business on a regular basis.  If you are renting, maybe you can find a less expensive place in your area or find a friend who is looking to share expenses and you can get a bigger place that costs you less.  You could also consider some non-traditional ways to reduce your cost of housing by looking for long-term house sitting opportunities, living on a boat or in an RV, or living in a house with a large number of people.  While these may not be at the top of the list of things you’ve always wanted to do, they can be great ways to save money on your single biggest budget item.

The next biggest thing in a lot of budgets is transportation costs.  I see a lot of people who have car payments of $400 – $700 per month. Usually when we’re having these conversations, it’s because they are struggling to pay their bills in a timely fashion.  And, when I ask about the car, it is typically a new car and they are less than a year into the payments.  Cutting payments like that in half would typically enable someone to not be stressed out every day.

Do we all like to drive a nice car?  Sure!   But, at what cost?   In most of our lives, cash is not an unlimited resource.  Only so much comes in the front door, and only that much can go out the back door unless we are racking up unhealthy levels of debt.  If you can control the amount of money that you spend on a car, and you absolutely can, don’t let a nice car drive you close to bankruptcy.  It’s just not worth it.  Buy a high quality used car and maintain it well and you will spend more of your life without a car payment than you will with a car payment.  My car has been paid off for 10 years, and while it’s not exactly a thing of beauty right now, it’s paid off and still runs like a champ.  I’ve replaced some expensive parts, but it’s not nearly as expensive as having a monthly obligation.

When you are looking at ways to make progress on your budget, don’t get caught up in only looking at the micro budget items.    Are they important?  Absolutely!  But don’t limit yourself to looking at them.  Look at the macro budget items too.  What are the 3 biggest items in your budget?  What can you do to reduce them?  If you are creative and disciplined, you may find that you can significantly reduce your expenses each month and then start saving a ton of money toward the other goals in life that are important to you.