Gather Little by Little

While we may want things, all we really need are life basics: food, housing, transportation and clothing. Anything beyond that is a want. Granted, it may be a very important want, but it would still be a want. A need is something we require in order to survive, a want is everything else.

Using the concept of life basics, I am going to show you an alternative to reducing your expenses to pay off debt or to save money. I’m going to show you how to increase your expenses and accomplish the same thing.

So get out a sheet of paper or fire up that spreadsheet and let’s get started:

Step 1 – Life Basics

List out the life basics, and next to each place your monthly cost for each. Food should include only your grocery costs (sorry, but eating out is a want). Housing is your mortage or rent payment, insurance, property taxes and utilities (water, power, and gas). Transportation includes car payments, insurance, gas, and maintenance. Clothing is of course clothing.

For example here are mine:

Food	$1,100 (yes you read that correctly…remember I have 6 kids)
Housing	$1,670
Transportation	$650
Clothing	$200
Total	$3620

The total of these expenses is your expense base, the minimum amount your expenses can be. I am going to assume you’ve reduced these expenses as much as you can. Also safe to assume is that in a true critical situation, you could reduce all of these expenses even further (i.e. live on rice, beans, pasta, sell your current car and buy a “junker”, etc.). But your expense base should be your minimum without severely cutting into your lifestyle.

If I made $50,000/year net, that would leave me with $6560/year or $544/month to save or pay on debt. Wow, where did all that money come from? Let’s find out..

Step 2 – Where is my money going?

List off the remaining items in your budget. If you don’t have a budget, I strongly advise you to create a budget. For the purposes of this exercise though, just list off the expenses you can think off and put a dollar amount next to them.

Now, I want you to rate them in order of importance. 1 – being the highest, 2 – the next highest, 3 – the next and so on.

You should have something like this:

Health Ins	$250.00	1
Eating Out	$200.00	5
Cable TV	$100.00	4
Movie Rental	$30.00	6
Starbucks	$30.00	7
Cell Phone	$80.00	3
Home Telephone	$40.00	2
Golfing	$100.00	9
Scrapbooking	$100.00	8
Video Games	$60.00	10
Total	$990.00

Ranking the list is a way of making you think through what’s really important to you. In other words, the wants you would find hard to give up.

Step 3 – Increase Your Expenses

Now that we have our wants listed and prioritized, begin adding these to the expense list we built in step #2. Each time you add an item, I want you to recalculate the amount remaining for savings and/or debt reduction.

As you do this and see the remaining amount dropping, it’s going to cause you to really examine how bad you desire that want in your life. What’s even more effective is to have your debt snowball or the interest rate on your money market account handy. Each time you add a want to your your expense list recalculate the debt snowball or long term savings impact by that amount. The changes can be surprising.

Here’s an example:

If I add in Cable TV, reduce $100 from my montly debt snowball amount and/or calculate the impact of not contributing $100 to your 5% money market account or your 10% 401k over the next 20 years. Doing this will make you directly impact the true cost of your want.

Challenge: Cut your wants at least in half. For a super challenge, cut it to just one or two items.

By determining your needs (life basics) and then increasing our expenses by our wants you’ll feel the impact of these decisions a little more. This exercise makes you realize the true impact of spending $100/month on cable. Sure, that $100 looks like a small amount, but placed into a 401k at 10% interest over 20 years, $100 becomes $76,000.

If we took the original savings amount we had after subtracting our expense base from our net income ($544.00) and put that in the same 401k, in 20 years we would have $413,000 !! That’s the power of compound interest at work.

Run through this exercise,take a hard look at your wants and avoid adding in what you don’t really need. Sure, it will be painful in the short term, but the longer term rewards sure will pay off.

Thoughts or comments? Completely disagree? Leave a comment!