Just before we last did our family budget exercise, I was concerned about how much we were paying for food, and had guessed that our family of two adult and two elementary school children was spending about $200 a week at the grocery store.
But the truth was much worse. We were spending $300 a week on groceries, making that by far our largest monthly expense category, nearly twice our house payment.
That won’t be the case for many families creating a budget for the first time, but calculating your exact monthly expenses will, one way or the other, be an eye-opening experience.
For many people, the house payment or apartment rent will represent your largest monthly money drain. We were lucky because, when we moved out here to the sticks from Houston six years ago, we found a house we liked that we could afford, we were able to make a sizable down payment and the mortgage rates were at near historical lows.
The other thing working in our favor is that we could be comfortable remaining in this home for the duration. Because of that, fluctuations in the real estate market aren’t of nearly as much concern for us as for many younger couples, who know they’ll be moving along with a promotion or new job, and need to make sure and get as much value out of their houses as they can, to be able to afford the next one.
Needless to say, a lot of people in that situation have been whipsawed, even in the greater Houston region, by collapsing real estate prices. It’s gotten so bad the New York Times’ Ron Lieber recently wrote a column weighing reasons to consider just bagging out of your mortgage.
I have to say that unless the alternative is certain bankruptcy, I would have extreme difficulty advocating such a move, because in the long run your word not only is your bond, it’s your credit rating. But then, I’ve never been in a situation where I’m making payments on a house worth a third of its value at the time I borrowed the money to buy it.
Digression aside, once you have your list of monthly expenses, including annual expenses divided by 12, you have just acquired a new tool for improving your financial situation.
The first thing my wife and I did with our expense list was to sit it next to our income list and imagine what would happen if one or the other of us were to be laid off. What could we do without on that expense list if we had to?
In our case, we are spending between $500 and $900 a month for child care (more in the summer months when two children are attending). If one parent is laid off, the kids can stay at home, and that expense goes away.
We’ve been spending far more than I think is necessary on what I’ll roughly call communications – roughly $235 for land-line phone service, cell phone service, Internet service and satellite TV. In case of layoff, I could easily lop more than a third off of that number and get along with less but adequate service.
Then we have a monthly charge for my wife’s gym, and precious little else that could be shaved in an emergency.
Our insurance costs are pretty much static, as we’ve shopped for the lowest-cost reliable provider of the coverage that we require. The amount we’ve budgeted for clothing, car repair and home repairs also appears to be set at the proper level and isn’t optional.
What we’re left with is the ability to squeeze some savings out of our natural gas and electricity bills via conservation and adoption of things such as a solar hot-water system, and that big, fat food bill.
More on the food later, but another issue with which we were confronted was the fact that we had an income stream a good bit larger than the money running away in the form of set monthly expenses. This was a good thing, except that we weren’t saving very much of that difference. Instead, it was going away in the form of discretionary spending – restaurant meals, birthday gifts, landscaping, software, home decorating, miscellaneous gizmos.
We decided to cut the discretionary spending back to the bone and save the money instead. Since the Re-depression still appears to be getting deeper each month, and both of us are employed in what we consider vulnerable sectors, it makes sense to us to prepare for a financial crisis in the event one materializes.
We realize that also means we should proceed to cut expenses beyond discretionary spending, and convert that to savings, too, at least until we have something close to the sum of our two annual salaries.
One annoyance in our effort to save is the fact that a 12-month, $5,000 certificate of deposit pays about 1.6% interest, which is approximately as attractive as keeping your cash in a well-hidden mayonnaise jar. Yet the same bank happily sets its best credit-card interest rates at 12% or more. Don’t get me started on banks.
Everyone’s budget situation will be different than ours. But some similarities apply to everyone:
→ Your debt is almost certainly costing you more than you can earn on any savings vehicle or “investment,” so you should concentrate on reducing your highest-interest debts first.
But that strategy has its limits. Over time, we have paid off all our debts except our monthly mortgage. No loans, no car payments. We have so far opted, however, to pay little or no extra principle on our home mortgage. That’s because we think cash is more valuable than additional home equity right now, even though it would reduce the length of the mortgage. Around here, the real estate crunch is likely to be worse next year than this year, we believe. The year after, who knows?
We may need cash at a moment’s notice. If it’s tied up in additional home equity, it won’t do us any good in an emergency.
→ After you have your debts in order, you need to start saving. That probably means you need to quit spending money on non-essentials. It’s no fun, but neither are hurricanes. In a financial sense, that’s what you’re guarding against.
→ After you’ve cut out discretionary spending, you can still save more money by paring down your expenses. We just went through the beginning of that exercise above, remember?
Which, in our case, brings us to food – the biggest “flexible” item on our expense list, with $1,200 a month going to the grocery stores.
Unfortunately, I don’t think there’s a silver bullet for cutting food spending down to size. In part this is because we’ve already decided to chart a course toward buying local produce, eggs and at least some meat, in order to lessen our dependence on crappy, nutritionally questionable factory food in favor of healthier whole foods grown or produced by people we have come to know and trust.
Right now, local producers can’t offer their vegetables or fruit or eggs or meat for the same low prices the big chain grocery stores do. Of course, their products are generally of better quality, so you’re getting more for your money, and that’s the trade-off.
But the tide is likely to turn in favor of the local food grower or producer, as a variety of global factors hit the fan simultaneously when the price of oil reaches and then passes $130 a barrel again, which I believe is inevitable current Re-depression notwithstanding.
Here’s the nut graph of a fairly likely scenario from a UK agricultural scientist adept in the ways of risk assessment:
Cereal grains are increasingly used for livestock feed. Most, for example, of the huge USA corn and soybeans crops goes for animal feed. When this use is combined with the increased demand for biofuels, it puts a serious strain on resources such as fertilizer that underpin grain supply. Asia—with 57% of the world’s population–is now attempting to adopt more of a Western style diet as well. This pattern is not sustainable, especially if oil and natural gas supplies are expected to decline over the long term.
The general trend, I expect, is that food prices will rise, faster than most other commodities. All the more reason, we think, to continue growing as much of our own fruit and vegetables as we can, and to extend the harvest by freezing and, like grandma used to do, canning or drying the overflow.
Coming next in Family Math: How to use less electricity and pay lower rates for it, even in Texas.