Friday, June 27, 2014

What’s Your Monthly Nut?

Monthly Nut
The Wall Street Journal ran a great article by Carolyn Greer this week, From Spender to Saver to Investor. The financial media focuses so much on investing, it was refreshing to read an article about an every day person with every day money struggles. The story illustrated the exact type of family we strive to help.

 “A reader in Minneapolis has an all-too-common problem. Despite holding down a job in luxury-car sales for the past eight years, he struggles to save money.” The story went on to describe the exact circumstances of so many that I've worked with over the years:
  • living paycheck to paycheck
  • not living a life of luxury, and
  • watch what they spend.
Why, one wonders, would someone who has a steady job and is careful about their spending still be struggling? That’s a question that perplexes millions of people about their own finances.

The answer is often found in their "monthly nut,” the amount of set expenses they have signed up for when they bought their home, car, private school tuition or any other number of financial decisions that we make and are then locked into for 5, 10 or even 30 years. You can tighten your belt month to month all you want. If your mortgage is 45% of your income, getting to the end of any month with extra money is going to be a problem.

I suspect that that is where the solution to Mr. Minneapolis’ quandary lies. His “monthly nut” wasn't mentioned in the article. If he was being honest about his obsession with careful spending, the only answer left is that his core expenses are too high for his income level.

Our financial health equation is simple:

Earn  >  Spend  =  Savings

When we talk about cutting back on our spending, we are usually talking about eating out less, watching our grocery bills and not buying so many new pairs of shoes. But the discretionary areas our spending, according to the Bureau of Economic Analysis, are often only about one-third of our expenditures. Shelter, transportation and health care comprise nearly two-thirds and thus have the biggest impact. I suspect that Mr. Minneapolis’ monthly nut includes a home that is more than 30% of his monthly income. 

Society encourages us to buy the biggest home we can afford. Mortgage brokers and Realtors persuade us, "keeping up with the Jones'" eggs us on, and our tax code puts the cherry on the top. "Oh, but I’ll be able to deduct more." Yes, yes you will.

If you really want to make an impact on the spending side of your financial health equation, get a pencil and paper out and do the math on what your financial situation would be if you bought a home that had cost 80% of the cost of your current home. And it’s of course not just the mortgage, but the total cost of your home impacts the cost of property tax, insurance, utilities and maintenance. The average cost of maintaining a home is around 1% to 3% of it's value. Price matters.

Did you do the math? What would your equation be? What would you do with the extra money you've not spent on your shelter?

“What would you do with the money” is the trick. If you're going to take that money and buy more shoes and dinners out, then you might as well just stay in your bigger home. But if you're going to take the extra money and use it on some important goals you haven't been able to reach, then perhaps its time to start hunting for a new home.

I can hear many people saying “hey, moving, selling and buying a home itself carries a cost with it!” True. If you're going to make a decision like this, you really need to be sure the math pencils out. For many, it will. If you really want to make an impact on your long term financial health, this is a decision that should be considered carefully. Even if you decide not to do it, simply considering it will give you a fresh perspective on your monthly quandary.

And don’t forget to make an honest assessment of the rest of your monthly nut. Shelter is most people's largest expense. Once you’re done with that calculation, move on to your next largest category. Is it transportation, children's tuition, vacations or some other area that is causing the squeeze on your financial health equation? Do that math too.

How much of an impact could you have on your financial health equation if you made one hard choice?

- Stacey Powell

Finance Gym offers personal finance coaching in professionally facilitated peer-advisory groups.
Reach your financial goals. Get motivated. Get support. Get results. Are you ready?