Assessing Which Expenses You Can Eliminate
Most of us have too much stuff, but there are certain things that we all need: a place to live, food to eat, clothes and shoes to wear. Many of us need cars to get where we need to be. Some of us need things such as medicine on a regular basis, glasses, or contacts. We need a telephone, a heater, and a fan. Some things are simply necessary.
Nobody is going to argue that you shouldn't buy the things you need. It makes no sense to put money in the bank that you should have used to buy yourself a pair of glasses. Our argument is with thinking, as so many of us do, that you need everything you see, or everything that someone else has, and then buying it. All that does is make you have too much stuff and jeopardize your financial future.
The Bare Necessities
There are some expenses you simply can't avoid. These include taxes, shelter, utilities, food, and some form of transportation. If you have college debt or owe on a credit card or car loan, repayment of those debts is a necessary expenditure. You'll also need to pay for insurance, health care costs that aren't covered by insurance, clothing, and education costs if you're still in school.
In addition to these nonavoidable expenses, there is another financial necessity: regular contributions to a savings account, retirement fund, or other vehicle, to assure your future financial health. This is the most overlooked, neglected necessity there is, and a huge source of regret among people who didn't do it.
Dollars and Cents
When you start thinking about how you'll spend your paycheck, deduct the amount you plan to save first. If you want to save 10 percent of your paycheck, for instance, don't even consider that money as part of your income. Deduct it automatically and budget with the remaining 90 percent. Remember, it's important to pay yourself first!
The temptation to skip this last necessity is great. You think you're doing just fine. You're paying your bills and paying back some of the money you owe for college loans and credit cards. But what about the future? What about the house you want to buy someday? How about expenses you'll have if and when you get around to having kids? What about the Master's degree you're thinking about?
If you can foresee expenses down the road, money to pay for them should be included in your “what you need” category. They won't pay for themselves, and the sooner you can put some money away for specific goals in the future, the better off you'll be.
It's hard to defer buying now in order to save for a future goal. It defies our society's mindset of getting what we want when we want it. But if you pass on the leather jacket and invest the $250, you're on your way to sending a child to college someday or getting out of the apartment and into your own house.
Niceties or Necessities?
Now that we've covered the necessities, we'll have a look at some things that are often thought of as necessities, but might not be:
- Household furnishings. Nobody wants to live in an empty house or apartment. Some furnishings are nice, but are the curtains that match the bedspread necessary, or is that need really a want? Expensive artwork, decorative rugs, the state-of-the-art microwave, and the solid cherry entertainment center that houses the big-screen TV are not essential to your existence.
- Cable TV. Many people claim they couldn't live without TV, but we'll go out on a limb here and assert that they can live quite nicely without HBO. Cable TV is expensive, and the extras can send your bill through the roof. Look at this area carefully when determining what you need.
- Restaurants and bars. Food is necessary, but eating in restaurants is not. Although it's nice to get together with friends after work or on weekends, you can spend a lot of money on a few drinks in the bar. If everyone agrees, maybe a rotating happy hour at someone's apartment makes better financial sense than the bar.
A college-age friend was horrified recently when her boyfriend, who had too many beers while hanging out in the local bar, threw his American Express card down and told the bartender to get a round for everybody. Had she not grabbed the card and escorted her boyfriend out, he could have been looking at a large and completely unnecessary expense at the end of the month.
- Wheels. If you need a car to get back and forth to work and to the other places you go, it's a necessity. But there are many cars to choose from, and some cost a whole lot more than others.
- Bad debt. Some kinds of debt are worse than others. A mortgage, college loans, and even a car payment are understandable, necessary debt that you'll have to repay. But if you're paying 18 percent interest on a fancy dinner at a restaurant that you charged to your credit card three months ago, that's really bad debt.
- Drugs and personal items. There is a lot of gray area in this category when it comes to want versus need. You need vision care and glasses, but do you need designer frames? You need skin-care products, but do you need a basketful of cosmetics in every color produced? You need medicine for your headache, but doesn't the store brand work just as well as the higher-priced Tylenol?
- Classes and instruction. Financing an education is one of the best expenses you'll ever have. There may be a time, though, when you'll have to defer on classes and instruction until you're better financially equipped to pay for them. If you need a Master's degree to advance in your job, then by all means go ahead and work toward the degree. But the philosophy course that you thought sounded interesting will be offered again next year, and it might be a good idea to wait until then to take it. You might also want to hold off on the flower-arranging course, the personal trainer at the gym, and the bassoon for beginners program.
- Fashion. You need clothes. You don't need Nautica. You need shoes, but you don't need more pairs than you can fit into your closet. If you can get away with not wearing a suit to work, you probably don't need clothes that have to be dry cleaned. Many people have closets full of clothes they don't wear, on which they've spent hundreds, even thousands, of dollars.
- Entertainment. Some people will disagree, but we say with conviction that leisure and recreation are necessities. Regardless of what you do, you need leisure time and fun activities with which to fill it. The problem is, leisure can be very expensive. Although you need entertainment, you don't need the fancy cruise you booked to the Bahamas or tickets for two to Mamma Mia!.
- Extras. You say you need exercise, and you're right. You could get sufficient exercise by running and working out with some weights at home, but you want to take the Pilates class at the gym where everybody goes after work. And the leggings that you love to wear because they make your legs look longer? That's a want, not a need. The expensive salon haircut, the gift you got for your girlfriend last week, the watch that cost a third of your weekly salary, the daily cappuccinos, and the you-name-your-favorite weakness are wants as well.
When you separate your needs from your wants, you'll have a much clearer picture of how to pay for both of those categories. You'll know exactly where your money needs to go. You wouldn't think of skipping your rent payment to go on vacation, would you? That's because you recognize that the rent is a need, but the vacation is a want. Some spending decisions aren't so obvious, however.
A good thing to do is to make a list of your needs and make another list of your wants. Be honest with yourself, but not indulgent. Don't underestimate your needs, because you must know what they are to determine how much money you'll need to pay for them. On the other hand, if you confuse wants with needs and think you need more than you actually do, you'll become frustrated that your paycheck can't stretch that far.
If it gets to the point where you can't finance your needs, you need to make some pretty drastic lifestyle changes. If you live by yourself, maybe you need to get a roommate to cut housing costs. After all, living alone, by choice, is a luxury. Or maybe you need to trade in that new Honda for a used one. As long as it gets you where you need to go, does it really matter if it's a 2003 or a 2001?
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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