Living within Your Means

“Unemployment is capitalism's way of getting you to plant a garden.”- Orson Scott Card

Last year I was laid off and unemployed for the first time in my life. My job hunt for a new job lasted six months. During that time my family was naturally concerned but not panicked. We did OK and suffered no long-term harm.

Looking back I ask myself – what did we do right? (The wrongs are easier: not keeping job skills up-to-date, not job hunting at the first sign of trouble, trusting managers to care about my welfare)

So what did we do Right? Minimizing expenses and avoiding debt. My wife and I are both debt adverse. In order to graduate college without a loan I had to work at the university and every summer (night shift for extra pay). My wife worked two jobs and rented out the basement to a boarder to pay the bills before we met & married. After we married, some of the money from my job went towards extra payments on the mortgage so that it was paid off a few years later. We drive our cars until they fall apart and then buy a used car paid in cash or financed as little as possible. Our credit cards are paid in full every month. We do not tolerate debt.

The formula for debt avoidance is quite simple – spend less than you make. In order to make this work you need to have a budget. The evening I was laid off, we sat down at our computer and looked at our budget for anything and everything that was nonessential and could be cut out. No magazine subscriptions, no online-computer game fees, no eating meals out, no movie rentals, no new clothes, and so on. It helped a lot that we had no debt to pay off.

A debt-avoiding budget has two parts- Earnings and Expenditures.

For Earnings look at how much money you take home after taxes and payroll deductions. Don’t forget to subtract out town & school taxes, water bills, and other local government expenses. What remains is your spendable earnings.

For Fixed Expenses add up your monthly bills for electricity, oil or gas, telephone, cell phone, cable TV, Internet, tithing, mortgage or rental payments, car lease payments, credit card minimum payments, etc. If your bills exceed your spendable earnings you’re in real trouble and need serious financial help.

Discretionary cash. If you subtract your fixed expenses from your spendable earnings, what’s left is discretionary cash. This needs to cover food, gifts, clothes, school supplies, and everything else you will buy at a store or online or at a restaurant. This is where modest living and a budget really helps. If you know you have just $100 available to spend this week, will you buy new shoes or food?

When I was unemployed, we tried to lower our discretionary cash spending to as close to zero as we could. We used our Food Storage and bought very little at the grocery store. We fixed old clothes. We did not vacation or travel. By doing this we could almost (but not quite) get by with the amount of the weekly unemployment checks.

Often times discretionary spending, either with cash or credit cards gets out of control. Each year my wife and I fill out a spreadsheet with the money we spent. We look at checks and the credit card bills and assign expenses to categories to determine how much we spent on food, clothes, meals, etc. The hardest thing to categorize is cash spending, for this we try to keep receipts. When we did this for 2008 we found that I was spending way too much cash for breakfast and lunch in New York City. So we agreed on a new plan for my new job – I would eat out once a week and bring lunch to work the other days.

While I was unemployed, my wife used our budget in a clever way. She calculated the minimum we could expect to pay on bills and food with some money set aside for emergencies like car repair, vet bills, etc. We then doubled that amount to calculate the minimum salary I would have to earn to continue living in New York State. We doubled the amount because we assumed half the money would be spent on taxes, church tithing, and a tithing paid to our retirement account. We were quite surprised at how much I had to earn to pay for a modest lifestyle in this area.

Bottom Line

Spend less than you make. Tally up your expenses to discover your spending habits. Create a budget and adjust your expenses to fit within your spendable earnings.