Which Economic Survival Strategy?
By Steve Gillman
There are many financial survival tips I could offer here,
and you'll find some of them on many other pages of this site.
But for this entry I want to focus on one important point: Fixed
expenses. To demonstrate how important it is to have control
of your regular ongoing living expenses, we'll start with two
very short stories about Jim and John and there economic situations.
Jim and his family spend money every week to go to the movies.
They eat out regularly also, and take trips for picnics or to
go to events that cost quite a bit. They like to enjoy life and
aren't afraid to spend money to do so.
John and his family avoid eating out. They watch whatever
movies are on the television. Instead of trips out on the weekends,
they take walks or go to the park. They use coupons when shopping
and always look for the best price when buying things. They haven't
had a vacation in years.
Now a question: Do you think Jim's or John's family is more
financially secure and prepared for economic survival? Of course
it is impossible to say much until we know more. So lets's continue
Jim's family lives in a house that requires just 20% of their
income each month for the mortgage, taxes, insurance and repairs.
They replaced all light bulbs in the house with low-watt fluorescent
bulbs. Though they have credit cards for convenience, they pay
them off each month and so have no credit card debt. They drive
a high-mileage car - their only car. In addition to their retirement
accounts they have $11,000 saved for emergencies.
John's family lives in a nice home that eats up almost 40%
of their income each month. It's a large house that has high
utility bills. His family has $15,000 in credit card debt. John
drives a big SUV with a big monthly payment - but he got a great
price on it. His wife drives another car with a loan on it. They
have a few hundred dollars in their checking account.
Financial Survival - Why Fixed Expenses Matter So Much
For all their easy-spending habits, Jim's family is clearly
prepared for a lay-off or other loss of income or emergency.
On the other hand, if John loses his job or has some large unexpected
expenses, his family could face losing their home. In fact, it
wouldn't take much for them to be pushed into bankruptcy. The
crucial lesson here is that for economic survival it's far more
important to keep your fixed living expenses lower than to be
a good shopper.
Here is a strategy you can implement to make yourself and
your family far more prepared for economic survival. Start by
listing every regular expenditure which cannot easily be eliminated,
such as rent or house payments, utility bills, debt payments,
and car costs. Include anything that you can't easily stop paying
for at a moment's notice.
Now find every possible way to cut the cost of each thing
on the list. Refinance your home to lower your interest rate
and payments if possible. Set the heat a bit lower in the house.
Replace lights with more efficient ones. Reduce and eliminate
debt starting with accounts that have the highest interest rates.
Focus your efforts on these regular expenses before you even
start to think about cutting back on your morning coffee stops,
movies or other habits. Those latter kind of expenses can be
eliminated whenever you need to do so.
Bank the money you save from your efforts until you have enough
saved to live comfortably for six months without a job. Learn
to live on just 75% of your take-home income. At that point you'll
be more financially secure than most people. And when you achieve
this control over your financial life, going to the movies or
eating out when you feel like is no longer fiscally irresponsible
- it's your reward for good planning.
Of course you can shop sales and negotiate the best prices
on large purchases, but these strategies are not crucial for
financial survival. It's far more important to keep fixed expenses
low and have money in the bank. When tough times come, you can
always stop going to the movies or taking vacations, while those
who spend all of their money on fixed living expenses cannot
easily reduce their spending. They'll face much tougher times