Just before the economic decline that began in the last quarter of 2007, the average personal savings as a percentage of disposable personal income for households in the United States hovered just below 1%. Over two years later, despite high unemployment, the percentage remains seemingly unchanged. Credit card debt. Recession. Real estate meltdown. What relief do we have in the face of a steady stream of economic gloom? We can start by setting aside money for future expenses as well as keeping in mind a number of spending traps.
Paying off debt is much harder than taking it on
We dislike being confronted with this reality until the monthly statement arrives in the mail or their inbox. While credit cards serve a useful purpose when used carefully and with responsible planning, we cannot forget how much they can afford to pay back. Easy access to our money with debit cards and ATM machines do not help matters, but we can take a proactive step and setup a text message alert with our bank that notifies us of our account balance before making a purchase.
The allure of home equity loans
We like the fact that home equity loans are tax-deductible and that we can use the money to pay off a large debt like a credit card. If we do not intend on using that credit card ever again, using a home equity loan would make sense. However, if we fall into the trap of using our newly paid-off credit card and resume our spending habits, we would have the loan AND the credit card to pay off.
Spending unexpected income in your mind
Did you or your spouse already spend the extra money in your minds? For example, you want to remodel the kitchen, whereas your spouse wants to take the family to Hawaii. Before the money arrives, deduct any taxes from it, then work with the remainder.
Creating a “complete” budget
Does your budget include spending on food, housing, and transportation? Yes, as it should. However, is it complete? No, especially if you excluded occasional expenses such as taxes, gifts, insurance, car repairs and family vacations. How can you include occasional expenses practically in your budget? Estimate how much these expenses will come to on an annual basis, then divide that figure by 12, allowing you to set aside enough money each month.
Budgets are a mutual agreement
You and your spouse are agreeing not only on the “complete” budget, but also on allowances for each of you to spend money on what is important to you or them. Drawing up a budget that excludes these allowances would cause resentment and cause one to spend the money in other ways.
So what does it take to live within your means? Awareness of your financial situation, making sound financial decisions, and discipline to follow through with a carefully made budget come to mind. Understanding that using credit cards produces debt straightaway whereas spending cash is merely a reduction in assets would be a significant step away from falling into a spending trap. You can borrow money against your home to pay off a debt, but make sure you never create that debt again, lest you have two payments, the original debt and the second mortgage, to make every month. Finally, creating a complete budget that includes spending on regular and intermittent expenses, as well as allowances for you and your spouse, will help you both live within your means and be better prepared for life’s spending traps.