Frugal Intuition

Welcome to Frugal Intuition.  If you’re just now joining us, take a moment to go check out Part 1 , Part 2 , Part 3, Part 4 and Part 5 of the series.

Now, when last we left our friend Bob and Sue Spendthrift, they had finished totaling up their budget including all their monthly expenses, discretionary spending, credit cards, loan payments, and estimates for annual expenses.  They hadn’t factored in savings yet.  Their total for the month was $3029.  Their total monthly income combined was $3200.  Only $171 of wiggle room.  Or is there?  Let’s take a closer look at some of these expenses, in particular the discretionary section they filled out from their Part 1 homework.

• Gas for car ($200 for household)
• Groceries/household supplies ($500)
• Entertainment ($100)
• Dining out ($120)

Okay, well other than planning their errands more efficiently, the gas budget probably isn’t going to change much.  But let’s look at that dining out.  $120 for 2 people to eat out.  Bob and Sue always order tea or sodas with their meals and usually enjoy appetizers or desserts.  The smartest thing for them to do would be to cut back their dining out to once a month or not at all for a while.  So why don’t we change that budget to $30 a month for dining out–it’s a treat when they stick to their budget.  And while they’re out, they’re going to order water and save another few bucks.  So that frees up $90 a month to add to that $171.

Now what about that entertainment budget?  This is Bob and Sue’s movie habit.  Every weekend, they’re going to the night showing of some new release in the theaters.  And they buy popcorn and drinks.   One big change they can make is to start going to matinees.  There’s a $3 per ticket difference between matinees and night shows at their local theater.  So that’s easily $24 just making that change.  If they snack before going and just share a drink, they’ll also cut down on their food expenses.  That’s another $36 right there.  Even better, they can check out the selection on Netflix and watch stuff at home, cuddled up on the sofa with their own popcorn and drinks.  It’s way better for cuddling.  So maybe they take 2 weekends and do the movie thing at home.  That’s another $12 saved.  So we’ve just carved $72 out of the entertainment budget to add to our $261.  Now we’ve got $333.

Okay, what about that grocery budget?  $500 works out to $125 a week, which is a lot of money to spend on groceries for 2 people in a week.  The Spendthrifts need to do some analysis of their grocery buying habits.  I’m willing to bet a lot of name brand items wind up in their cart.  There’s also probably a lot of waste going on when they don’t eat things before they spoil or forget that they’re in the freezer or pantry.  Let’s be conservative here, and shave their weekly grocery budget to $100.  That’s $400 a month, which is more than adequate to cover groceries for 2 people.  Sue’s going to look into some thrifty recipes.  That’s another $100 we can add to our $333.   So just by making some discretionary adjustments, we’ve got $433 we can put either into savings or toward paying things off.

Let’s look back at those credit cards.   If you’ll remember, Bob and Sue had a total of $9,282 in credit card debt.

• Card 1: Balance $2,743 @ 21% APR, current minimum payment $109
• Card 2: Balance $566 @ 30% APR, current minimum payment $23
• Card 3: Balance $1,396 @ 28% APR, current minimum payment, $56
• Card 4: Balance $4,587 @ 25% APR, current minimum payment, $184

Let’s rearrange these based on balance.

• Card 2: Balance $566 @ 30% APR, current minimum payment $23
• Card 3: Balance $1,396 @ 28% APR, current minimum payment, $56
• Card 1: Balance $2,743 @ 21% APR, current minimum payment $109
• Card 4: Balance $4,587 @ 25% APR, current minimum payment, $184

Those are some really nasty interest rates.  The current minimum payments on these cards is $372.  That’s already included in our budget of $3092.  What we have to decide is how much of that $433 is going toward paying things off and how much of it is going to go into savings.  Now, it goes without saying that Bob and Sue have made a pact to cut up these cards and not add to their balances.  They’re turning over a new leaf in 2009, remember?  There’s a temptation, of course, to put all of that $433 toward the debt.  It’s a real strain and has been very much stressing the Spendthrifts out.  But if they do that and something happens, and they’re stuck without a contingency fund, then they’re right back to where they started.  So what about putting all of that $433 into savings?  That would add up pretty quickly each month.  Well, yes, but those interest rates…the minimum payments are going to take forever to pay off even the smallest card they have.  So my advice?  40/60.  Place 40% of the leftovers into savings (that’s $173.20–we’ll round to $175 for a nice even number) and put 60% toward the debt (that’s $258).  So Bob and Sue are going to add $258 to the $23 minimum payment on Card 2.  And at that rate, they should be able to pay that card off in 2-3 months.  Once it’s gone, they’re going to take that $23 minimum and the $258 of extra and add it to the $56 minimum payment on Card 3.  You can see the pattern here.  It’s going to be a snowball effect.  And with each month that passes, they keep putting that $175 into savings.

Also into savings, they’re putting the monthly amounts for their annual expenses.  Remember those?

• Car insurance ($1200 every six months, approximately $200 a month) [there is a significant savings to paying all at once instead of monthly]
• Car tag ($600 for both vehicles)
• Car maintenance (oil changes, tire rotations, etc.) (approx. $400 a year)
• Christmas and other gifts throughout the year (approx. $600)

It’s important not to forget to save for them so that they don’t pop up and derail the budget.

And perhaps the most important thing to remember when writing a budget–nothing is set in stone.  You have to create something you can live with .  Budgets are always adjustable.  But be realistic about what your needs are vs. your wants.