The lifestyle choices we make determine our spending, and they really matter. What you earn is important, but how you spend is just as important. Second of three in a series.
The lifestyle choices we make determine our spending, and they really matter. As detailed in the last article, the apartment or home you live in, how you travel, and what you spend on food, are the most important. According to the U.S Dept. of Labor Bureau of Labor Statistics (BLS) Consumer Expenditure Survey, the bottom 20% of earners spend 56% of income on food and shelter. Even the top 20% of earners spend 42% of income on food and shelter. Transportation is 16% for the bottom 20% and 17% for the top 20%.
The strategies you choose for saving money mean you will make trade-offs in these three areas: food, shelter, and transportation.
First, we will cover food. The United States Department of Agriculture (USDA) produces recurring reports detailing the cost of food on their website. Your tax dollars hard at work. Normally, I would say this with a lot of sarcasm, but this information actually has practical use to taxpayers! These reports include “Thrifty,” “Low-cost,” “Moderate-cost,” and “Liberal” plans, and by age. For example, a male aged 19-50 can eat in a “nutritionally responsible” manner for as little as $186.60 per month (Thrifty plan) and up to $373.20 (Liberal plan). Using these guidelines gives you a lot of flexibility on food spending, and they include the specific items and quantities, and do so without sacrificing on nutrition. Not bad.
Shelter considerations require a bit more thought. Here are the three most important aspects affecting the cost of shelter (and a fourth one to note):
(1) rent versus own,
(2) number of roommates,
(3) location of city and neighborhood
(4) proximity to where you work (this one affecting the cost of transportation, not shelter)
An extreme example using these variables: three roommates renting a 3-bedroom apartment in a low cost neighborhood, within a city that offers cheap rentals, and which is near where you work.
Continuing the extreme example, you are making only minimum wage, which in 2015 is $7.25 an hour. At a 40-hour workweek, that is $1,160 per month gross pay, or $1,000 net pay. Since this is in the bottom 20%, the BLS says that (on average) low earners spend $560 (56%) on food and shelter. Even though you are earning minimum wage, let us see if you can still save 10% of your net monthly income, or $100. If we take that $100 out of the food and shelter allotment of $560, that leaves you with $460 for food and shelter. You will use the “Thrifty” food plan, which is $187. That leaves $273 for shelter. If you have two roommates, it means together you can afford monthly rent of $819. I looked up 3-bedroom apartments in Muncie, Indiana (a cheap city to live in). The highest rent I found was $925.
Consider for a moment whether the apartment is walking or biking distance to work. Since you would no longer need 16% of the $1000 income for transportation, just this one added consideration means you could afford monthly rent of $1,300, spend $160 more on food, or some combination of the two. The point of the illustration is that, even in this extreme situation of the lowest wages, the right lifestyle choices give you room to save some money even at this level.
If you hate Muncie Indiana, or hate living with two roommates, I understand. Well, I understand about the roommate part. I have never visited Muncie, but it seems to be a decent place to live, and I imagine you could find minimum wage jobs there, if not better.
Let’s say I am just starting out on my own. I like Muncie all right, but I hate having roommates, and I hate not having transportation, other than that crappy used bicycle I got from Craigslist, but me and my two buddies scored a nice 3-bedroom apartment near work for $720, so my share is only $240. I spend $190 a month for food, so that leaves $130 a month for savings. I want to raid my savings, but what if I need a root canal, or one day a car hits me while riding my bike to work? Maybe I should build an emergency fund first so I have a safety net. I am living on $870 per month, so I need at least 3 months of living expenses, or $2610. At $130 per month, that will take 20 months, just over a year and a half. Ouch! I could try to get some overtime, add a part-time job, or try to find a better paying job. I could just wait it out for 22 months, or sooner if I can add any raises I get into savings. I could look for cheaper rent. Suppose that after six months, I find a somewhat better paying job netting $1,200 per month. I would have saved $780 by then, but going forward could now add $200 more to the $130 monthly savings. At this rate, I will have my emergency fund by the end of the year. Since I sacrificed for one year working at a low paying job and living with annoying roommates, I now have an emergency fund and am able to save $330 free and clear per month, even though I earn very little and have almost no discretionary spending yet. Now, I upgrade to a used electric scooter with a storage compartment by using the next two months’ savings. This is because now I have earned the flexibility to decide that improving my mobility around town is more important than getting rid of my roommates. I can then think about and plan what else I value, and then save for those goals based on what is most important.
Therefore, what you earn is important, but how you spend is just as important. Finding the right balance between having what you need when you need it, and sustaining a lifestyle to meet your needs, goals, and aspirations is your challenge.
There is no “one size fits all approach” to personal finance. Donald Trump and Mother Teresa had very different lifestyle goals, each resulting in very different decisions for earning, spending, and saving. You save and spend money based on the lifestyle you choose and the income you earn. Both you control. In the short term, you have a greater degree of control over lifestyle than income. This is true whether you are an employee or an entrepreneur. In the longer term, you can make trade-offs between both income and lifestyle. Maybe you room with a few people until you have a down payment on a condominium, or maybe you skip vacations to fund a child’s college fund. Each is an example of a specific goal (better housing, child’s education) and each satisfying an individual value (privacy, family future). Maybe you will add a part time job you hate because you want to reach the goal more than you hate more work.
You have the freedom to choose.
In the last and final segment, we will try to redefine wealth so it means something a bit more fitting than the traditional view.