The last few years have been tough on many. If you don’t know someone who has been downsized, changed careers, or experienced wild fluctuations in their income, I’m not sure where you have been.
Many people feel that cutting expenses is overwhelming or impossible. I decided to share my story to show it can be done.
We were in a good position going in to our personal financial crisis. Our expenses were definitely high, but with two good incomes, we could afford it. We had an ample emergency fund, no credit card debt, maxed out our 401(k)s every year, and bought our car with cash. Looking back, I wish I had attacked our student loans aggressively before we had a child and his education to think about, but no one is perfect.
To make a long story short, I lost my job along with many other people in December 2008. I found something new quickly, BUT went from being a salaried employee to an independent contractor. My income basically fell off a cliff, but it was very important to me to make this work — becoming a stay at home mom just didn’t feel like me.
All of a sudden, we were spending thousands of dollars per month MORE than we were making. We had a choice: cut back hard or start racking up debt.
What We Did
I had already been tracking our expenses, but now it was much more important. The number one priority was to make sure expenses were less than income every month. Sounds easy, but it’s a bit harder with a sudden drop in income and an eight month old baby. But we did it.
We Started Small …
I looked at our budget for places to cut.
- Gym memberships went from individual to family membership. Goodbye NYSC, hello YMCA. Savings/month: $65
- Car insurance. Everyone should shop their car insurance every few years. Your car is older and worth less, right? Savings/month: $30
- Takeout. We went from 3 nights per week to one. Monthly savings: $200
- Wine. Hubby schlepped wine from the Trader Joe’s in Manhattan instead of the pricey place around the corner. Savings/month: $200
- Books & Magazines. My weakness. I stopped browsing the Barnes & Noble, and shopped my bookshelf and the library instead. Savings/month: $40
So, that was pretty easy. We cut $535/month, or $6,420/year and barely noticed. We should have done those things years ago!
But it Wasn’t Enough
Unfortunately our income shortfall was a heck of a lot more than $535 per month. So we had to keep going:
- Parking Garage. My beloved parking garage, I still miss your convenience. But breaking up did save us $400 every month.
- Day Care. We moved our son from the expensive place near my (old) office in Manhattan, to a family owned operation in Brooklyn. This immediately saved $550/month, and I was actually happier with the environment. We later changed again (mainly because he got older), which resulted in a further $150/month savings. Total savings/month: $700
- Refinance. We’ve actually refinanced our house twice in the last 3 years, cutting our payment by $400/month in total, and saving thousands in interest over the life of the loan.
- Property Insurance. Apparently we were over-insured. Switching to a new carrier saved $100/month without changing our liability or deductible.
- Kid Stuff. Impulse purchases went out the window, but I also got creative. I cut my kids hair. I bought used toys and clothes at tag sales — toddlers don’t care! Estimated savings/month: $100
- Beauty Treatments. A facial and a mani/pedi was once a pretty frequent luxury. No longer. Savings/month: $100
- Lattes. I like drinking coffee at my desk, sometimes with a bagel. And eating lunch out every day adds up. My $4 coffee and $12 salad were easily costing $80/week! I stocked my office with English Breakfast Tea, and starting bringing a sandwich, at least most of the time. Savings $200/month
Now that was some serious progress. Another $2,000/month, or $24,000/year. It didn’t all happen at once, but we were now spending over $30,000 LESS per year on an annualized basis.
So We Brought Out the Big Guns
It still wasn’t enough. Now we had to make some hard decisions about our living situation, decisions we could have avoided if only I had made more money or been more successful. (That was hard to say. I’m repeating it because it is a sentiment I hear from others.)
- The Rent Was Too Damn High. Our apartment was expensive and under-utilized. We downsized, while staying in the same neighborhood. We paid a brokers fee, but cut the rent by $1,400 per month. Yowza.
- Cable. Um, we were paying for premium cable and internet in two places for a combined total of $300/month. I like HBO, but how much did I want to pay for it? We dropped cable completely (kept the cable modem for Internet; we’re not savages) and switched to a Netflix subscription for $8/month. It’s funny that this was the last thing to go, but I swear I don’t miss it. (A side benefit is that my son is exposed to very few commercials.) Total savings: $192/month
So that’s another $1,592/month, or $19,104/year.
Add it Up
$6420 + $24,000 + $19,104 = Total Savings of $49,524 per year.
(And that is after-tax money. Figure in 25% in taxes, and it is $66,000 pre-tax.)
I am well aware that most people do not have this much room to cut their budget. (And it’s more than a little embarrassing to admit just how much we were wasting). But I look at other people’s expenses and I know we are not the only ones.
Look at your biggest expenses first. Roughly 70% of our savings came from our biggest expenses: mortgage/rent, childcare and parking. Of course, those were also the hardest to cut.
The “little things” are worth considering too. It is very hard to change spending habits, but it is less stressful than watching your savings drain away or your credit card balances tick upward every month.
Cash flow is extremely important. Negative cash flow usually means debt is rising and there are no resources to save for the future. And frankly, negative cash flow (more going out than coming in) can be a big stress on your relationship or marriage, even if it is temporary.
Does this all sound familiar? If so, take a hard look at your cash flow. A financial planner can help, but the tough choices need to be made by you. Make them sooner than later and you’ll be glad you did.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sara Stanich and not necessarily those of RJFS or Raymond James.