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Keep the Latte! Focus on your monthly fixed costs to save money!

Posted on March 10, 2018April 17, 2022 by Mr.TimothyDavid

It has been a long time since I have contributed to the blog. I’ve declared today to be the day that I get back to it, and pen today’s post that will be focused on managing your liabilities and daily costs.

Many personal finance writers will focus on cutting that daily $5 dollar latte, or focusing on cutting that one costly habit that makes you happy. Costs like these are considered variable costs; that is these cost are based on daily behavioral choices. Behavioral choices can vary across individuals, For instance I may choose to bring lunch to work everyday, and buy a coffee for $3 each day, and you may choose to spend $5 dollars a day on lunch each day, and drink coffee at home. While variable costs are important in finding ways to save from a day-to-day standpoint, they are often optional as they are based on the choices of the individual. In times of hardship they can be reduced; contrarily, in times of hardship fixed costs have to be met, as they are often immovable in nature.

My advice is not to focus on variable costs as much, but to focus on keeping your fixed costs low. For most people, these costs these costs include:

    • Mortgage/Rent
    • Installment Loans (Auto, Personal, etc.)
    • Revolving Debt (Credit Cards)
    • Other contracted payments.

In the era of wage stagnation, slow growth of the economy, indispensable student loan debt, concentrated distribution of wealth amongst the top 1% (Wealth Gap Video); Keep your fixed costs low to be able to react to life’s ups and downs that are almost guaranteed. Take advantage of your low fixed costs to save and invest some of your earnings after expenses, which is what you really take home, and reduce the temptation to base your living situation off of two salaries.

Personal Income = Annual Salary – Taxes – Fixed expenses – variable expenses

Personal Income does not equal Annual Salary

Basing your living situation off of two salaries can open you up to risks associated with the loss of work. Below is an example of a couple basing their fixed costs off of their combined salary, and the impact of a job loss

——————————————————————————————————————————–

Husband’s Income: $50,000 annually or $3,000 after taxes per month

Wife’s Income: $55,000 or $3,000 after taxes and heath insurance per month

Home Loan: $300,000 30 year loan at 3.7% (principal and Interest of $1,380.85) (taxes, and Insurance of $320.15) Total Payment of $1,700

Auto Loans: $200 dollars per month for a car, and $305 per month for a SUV

Home Mortgage: ($1,700.00)

Cable & Internet: ($100.00)

Cell Phones:        ($100.00)

Car Insurance:     ($150.00)

Utilities:                ($210.00)

Food:                   ($500.00)

Gas:                     ($200.00)

Student Loan:      ($300.00)

Car Payments:     ($505.00)

Household Income: $2,235 per month

Household Income After Job Loss: ($765) per month.

——————————————————————————————————————————

Living based on one income:

Husband’s Income: $50,000 annually or $3,000 after taxes per month

Wife’s Income: $55,000 or $3,000 after taxes and heath insurance per month

Home Loan: $150,000 30 year loan at 3.7% (principal and Interest of $690.42) (taxes, and Insurance of $320.15) Total Payment of $1,010.57

Auto Loans: $200 dollars per month for a car

Home Mortgage: ($1,010.57)

Cable & Internet: ($100.00)

Cell Phones:        ($100.00)

Car Insurance:     ($150.00)

Utilities:                ($210.00)

Food:                    ($500.00)

Gas:                     ($200.00)

Student Loan:      ($300.00)

Car Payments:     ($200.00)

Household Income: $3,229.43 per month

Household Income After Job Loss: $229.43 per month

————————————————————————————————————————–

Resist the urge to fall into the potential two-income trap, live off of one income and be ready for the unexpected which you should expect. The loss of a job, the birth of a child can have an immense impact on your ability to maintain your lifestyle as demonstrated above. Make prudent choices as you merge two incomes.

Cheers,

 

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