3/19/2014 3:45 PM ET|
The case for living on half your income
With a little willpower, it’s possible to save half of what you make.
Living on half your income. Impossible? No. Daunting? Yes. How do we accomplish this? With willpower made of steely determination and making major sacrifices. Add to that a dash of honesty, and you're on your way.
All joking aside, the obvious first step is to cut back on your spending, and the way you do that is by taking a hard look at your expenses. But first, let's take a look at why anyone would want to save half of his or her income.
Given the recent challenges with the economy, it's just smart to save half your income. Even if you can't save half, you should aim to get pretty darn close to it. After all, you never know when you'll face a rainy day due to a layoff, illness , car problems, legal issues, etc. Many people are just one paycheck away from financial ruin. Living on half your income prepares you to live on less while saving more for that rainy day. And you can do this whether married or single. The question becomes: Can you live on less to save more?
How to get there
If you're married, pick one income to live on or save half of your combined income. If you're single, save half of your income.
- Track your spending for 30 days. Think of the next 30 days as an examination of your spending patterns. As with any diet, prior to getting started you must look at your current eating habits, and decide what must change to reach your goals. The same concept can be applied to improve your financial health. Track your spending habits for 30 days. On a weekly basis review your spending, and take inventory of necessary purchases and any frivolous or impulsive buys. Cut the extraneous expenses the following week, and you'll have renewed insight into where exactly your money goes.
- Go on the no spend diet. For the following 30 days, challenge yourself to spend money only on the essentials. This is where the steely willpower comes in. Can you limit yourself to only the essentials? Or will the daily latte, weekly happy hours or monthly shopping sprees (aka "retail therapy") get the best of you? If you're successful, then your bank account will thank you.
- Automate your savings. After you've tracked your spending and then limited said spending to only the essentials, now you're ready to rock and roll. Open an account and set the amount to be saved weekly, monthly or biweekly. Ideally, the money shouldn't hit your "spending" account – it should be automatically drafted into savings.
- Also from U.S. News & World Report: 11 expenses destroying your budget
Avoid the hurdles
House. How much will that "fun" but oh so optional do-it-yourself project cost you? How about the new surround sound speakers for the media room? New window panels for the dining room? Can you afford to let certain home-related expenses slide? Before shelling out cash for home improvements, decide if they are absolutely essential.
Car. Take a look at your expenses related to your car. This includes gas, insurance and maintenance. For those of us who live in toll areas, E-ZPasses are huge wallet busters! Taking a trip to New York from Northern Virginia? Expect to hit a few tolls on the way to your destination. The commute from the Washington, D.C. suburbs into the District can also rack up expenses after going through the toll plazas. The obvious solution is to avoid the tolls, and find alternative routes. Another car-related expense: gas. You can easily cut down this cost by utilizing savings clubs like Sam's Club or Costco, which sells gas about 20 to 30 cents per gallon cheaper than some gas stations. Also call your insurance company and ask about options that will save you money on the monthly premium. Can you increase the deductible and adjust the coverage to the minimums? Shop around for a lower rate, compare prices and see which company can save you money.
Kids. Bless their hearts, but they must be entertained. This can include eating out, buying random toys at the store, the last-minute school trip money that must be paid - tomorrow. You get it. Kids are expensive. The best way to set yourself up for success is to tell them about your new spending plans. Include them in your financial reviews, and make it a family activity. This way you can teach your kids the value of money while they help you reach your goals by being more conscientious about their financial requests.
- Also from U.S. News & World Report: 5 ways to fund your passions
The payoff is pretty awesome if you can swing this major financial task. Asking a family to save half their income today is like asking most people to cut off their left hand. Thoughts abound around how this will happen and what sacrifices must be made. But the payoff in the end saves you money and keeps you afloat should a worst-case scenario materialize.
More from U.S. News & World Report
VIDEO ON MSN MONEY
I already live on half my income...
...my ex-wife gets the other half.
This advice is impossible for some people. I am a single mother and I work full time. Half of my income pays daycare (I have no family nearby and all my friends have to work), my son's health insurance, and about half of my rent (and I don't exactly live in the best neighborhood as it is). Following this article would mean no food, being short on my rent each month, no gas or insurance for my car, no utilities, no phone (even a dumb, cheap one) and no essentials (diapers, clothes, shoes, food) for my toddler. I can't exactly explain to him that mommy is following a new spending plan - he's still learning to count to 10.
Now, before you jump all over me about assistance, I do not qualify for any help - food, utilities, insurance, or daycare - from the state because my income is over their limits. If you have ever really looked into the income limits, you would know that what they expect you to live on is ludicrous. I would need to have another child just to qualify and that's not happening. I budget my money very carefully, but I have next to nothing left over each month and that is using my entire income. This is not a "poor me" post, I'm simply just stating that not everyone can follow this plan.
So the way to live on half your income is to save half your income.....
Did I miss a major revelation here?
It's easy to save half your income when you make enough. I've already had my husband take a lower paying job after being laid off during the 2008 recession, and now his hours are being cut by 25%. And I had to take a paycut when I got laid off a year ago as well. So we've already had our income cut by close to 30% from what we were making 5-6 years ago. Our living expenses have gone up during that same time frame.... so, hate to be the downer here, but cutting out a latte here and there and avoiding tolls isn't going to get us there.
These articles are always spun by financiers to attempt to make you feel guilty for spending your own money instead of giving it to them. I have a neo-hippie mentality, in that I refuse to sacrifice today for a tomorrow that may never come. I'm no fool - I have a savings account, 401k, etc. - but because I'm no fool, I don't expect that twill support me 100% until I die because who the hell knows when that will be! I don't fear death because I know I wouldn't be alive without its inevitability. So, my philosophy to "live for today with tomorrow in mind', means I will enjoy being alive today because I can, but I won't have so much fun that I ruin any chance to have a pleasant tomorrow! Today's the first day of spring - soak it in, because you just might be around next year to enjoy it. CARPE DIEM!
I have a sign above my door, been there for years, it says
" Find out how the Rich man works, and how the poor man lives. "
I'll not pretend it's easy pr even remotely nice, but it can be done if you are willing to forgo the essentials that many think they can't live without like smartphones, new cars and eating out more than twice a year.
With 0% raises for the "workers" and 60% raises for the "Execs", I've had to resort to giving myself raises. Since my kids are older, I cut down the amount of my life insurance which had doubled in rates due to my age.
I'm down to the last drop of blood the CEO can drain from this turnip.
Just not fair but this is capitalism at it's finest (or ugliest depending if you're a 1%er or a 99%er).
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
RECENT ARTICLES ON PERSONAL FINANCE
Occupy Wall Street bought and forgave the student loan debt of more than 2,700 Everest College students.