Down to Earth
Page 5
Whether you like it or not, to live simply you must reduce your spending. It’s part of the territory. You will get away with not growing your own food; you don’t have to keep chickens or goats, make soap, bake bread, sew or knit. You can live in the city or the country, you can work or not, you can be young or older. But the one thing everyone should do is reduce their spending.
While some of us don’t have a problem with over-spending or debt, many of us do. If you have problems dealing with your money in a sensible way and continue to over-spend, this step might be difficult for you. Personal responsibility plays a huge role in getting yourself on track with your money. I cannot help you with that, except to say that it is up to you to make a decision to take control of your life and start to break that cycle of debt. You are the only one who can make that decision. You can read as much as you like about reducing debt but there comes a time when you have to stop reading and thinking about it and start doing it.
Think about the difference between needs and wants, then try to spend only on needs. When you have a budget you can relax more, but for now you need to cut your spending in order to change old habits and start building your new life. I’m not advising you to give up all your small pleasures, but choose your pleasures wisely and know, really know, what they are costing you. When you know the full cost of something – not just the monetary cost, but also what you have to give up and how long you have to work to pay for it – you might find you don’t want it any more.
Things you can do to cut spending
There is more information about many of these suggestions in the following chapters.
Give up an expensive habit. That might be alcohol, cigarettes, gambling, pay TV or recreational shopping. Be kind to yourself while you do it and when you succeed, reward yourself with a non-related activity that you love. If it is too difficult at first, cut down instead of giving up. After a period of time, try again. If you can’t do it the first time, or the second, keep going. It is only a failure if you stop trying.
Monitor your insurance and electricity, gas, water and phone usage. Make sure you’re not wasting a cent on any of these essentials. Check your usage and costs every year and try to get a better deal by doing research and calling your suppliers and their competitors to discuss better value for the money you’re spending.
Stop eating out and buying takeaway or convenience food. When you buy pre-prepared food you pay for the time and expertise of the person who is making your food. You will have cheaper – and healthier – food if you buy the ingredients and make it yourself. With a bit of organisation, you’ll be able to make your own food and, even on the busiest day, you’ll be able to eat at home.
Start packing lunches and drinks for the workers and students in your family. Take water in a bottle and a flask of good coffee or your favourite tea to work.
Cook from scratch. It’s much cheaper, tastier and healthier.
Don’t waste food. It is estimated that about 30 per cent of food bought for family homes is wasted. That’s like taking your weekly grocery money and throwing a third of it in the rubbish bin. Eat your leftovers for lunch the following day or turn them into a new dish the next night.
Plan your menus. Menu planning is another way of saving money. It’s simply taking time to plan what you will eat during the next week or month, and having the ingredients already in your pantry and fridge. When you do that you will buy according to your plan, look for specials, waste less food and save money.
Spend less time in the shops. The more you’re in the shops, the more you’ll spend. If you tend to wander through shops looking for things to buy, stop. If you shop weekly for groceries, go fortnightly instead. If you spend your lunch break browsing in clothes stores, go for a stroll around the block instead.
Start a stockpile. Put aside $15–$20 a week to buy things on special that you know will store well and be used. Use that money when you do your regular shopping and see storable bargains. When you’ve built your stockpile to a reasonable size, you can do your grocery shopping much less frequently, thereby spending less time in the shops.
Rethink the way you give gifts. Cut your gift list down to your immediate family and perhaps a few close friends. If you must buy gifts for a lot of people, organise it well ahead of time so you can fit it into your budget. Give homemade gifts or buy at thrift shops. Most people will appreciate a card with a thoughtful message or something that you’ve spent time making more than an expensive item.
Make your own cleaning products. Instead of buying the numerous expensive commercial products in the cleaning aisle, buy white vinegar, bicarb, laundry soap, borax and washing soda, and learn more about green cleaning.
Entertain yourself more cheaply. Borrow DVDs, books and magazines at the library instead of buying them. Take a small, portable knitting or sewing project to fill in spare time when you’re away from home. Instead of going shopping with a girlfriend, invite her over to your home, where you can make hot scones and coffee and use the time to talk. Invite friends over for a soap-making session, or to sew together.
Mend your things rather than throwing them out. It might be sewing a button on a shirt, replacing a zipper, cutting a split from a hose and connecting the hose up again, or cleaning and sharpening you garden tools rather than replacing them. When I was a spender, I threw away good clothing simply because it was ripped or needed a button sewn on. I would rather have worked a few hours more to pay for a new dress or new shoes than repair them. Now I value my time, and myself, a lot more.
Cut down on small things
One of the easiest ways to decrease your spending is to cut down on small things. My downfalls were cups of coffee, magazines and newspapers, bottles of water, and lunch. There were so many temptations that whispered, ‘It’s okay, it doesn’t cost much.’ Those whispers lied; those small things don’t cost a lot as a single unit but if you keep buying them every time you go out, they add up to a shocking and disappointing surprise.
Let’s take some time here to work out the cost of those little extras that give only fleeting satisfaction or quench a thirst. Buying a cup of coffee will cost around $3 – or more, depending on where you are. If you buy that coffee five days a week, forty-eight weeks a year (just looking at the working year), you’ll pay $720 a year for your cup of coffee. You could make a substantial extra payment on your mortgage with that kind of money. One or two extra payments every year will slice an incredible amount of time and dollars off your mortgage.
If you buy one magazine or a number of newspapers, they might set you back about $7 a week – another $340 a year. A bottle of water might cost about $2. One every day while you’re at work is $10 a week, or $480 over the space of a working year. And lunch – well, that could cost anything from $3 to $10, but let’s agree on $6. Six dollars a day, five days a week, will cost you $1440 a year.
Let’s look at this way:
Coffee: $3 a day × 5 days a week × 48 weeks a year = $720
Bottled water: $2 a day × 5 days a week × 48 weeks a year = $480
Newspapers/magazines: $7 a week × 48 weeks a year = $336
Lunch: $6 a day × 5 days a week × 48 weeks a year = $1440
Coffee + water + newspapers/magazines + lunch = $2976
Nearly $3000! All for little comforts and conveniences that, with a bit of organisation, you could replace with coffee, water and lunch from home, and a book or magazine from the library. You will still have your comforts at work but they’ll cost you a fraction of the price you’ll pay picking them up at a café or shop each day, and with less throw-away waste. You don’t have to be Einstein to work out that if you’re earning an average wage of $60 000 a year, before tax, almost $3000 is far too much to pay for the convenience of not having to do those things for yourself.
Become more energy efficient
Reducing your energy and water usage will help cut down your bills as well as your impact on the environment. Here are some energy-saving tips for the home.
Minimise electricity-powered activities. Sweep the floor instead of vacuuming, wash up by hand instead of using the dishwasher, and do less ironing.
Make your house more efficient. Change to solar hot water, install skylights in dark rooms, replace old light bulbs with new, efficient ones. If you’re in a cold climate, install double-glazed windows and insulated blinds.
Use less heating and cooling. Set the thermostat lower/higher (depending on the season) during the day, and turn the heating or cooling off at night. Dress more warmly in winter and keep quilts and rugs on the couch to encourage the family to use them instead of the heater. Heat or cool the main living area instead of the whole house, and close the door when you’re heating or cooling a room.
Wash your clothes in cold water and take shorter showers. This will save both energy and water.
After you’ve tracked your spending for a month to get a better idea of where your money goes, and have started to reduce your spending, you are in a great position to take control of your finances. This involves writing a budget, working out how much you can save, and organising your money.
Write a budget
A budget is an estimate of your income and expenses. When you write it all down, not only will you have a plan to work from, but you’ll also have an accurate and honest account of your financial situation.
I know some people hate the idea of writing a budget. They see it as a restriction. I did too, until I did my own budget and realised it was a plan to help us wisely spend whatever money we had. Instead of being the restriction I had been fighting all those years, my budget turned out to be the most liberating of all the changes we made.
There are many ways to write a budget and if you’ve already got one that’s workable, stick with it. If you’ve never worked with a budget before, I’ll explain how we do it below. There are only a couple of rules: you have to be honest, and, when you’ve written up your plan, you have to stick with it.
Write your monthly household income down on a piece of paper, or use a program like Excel and enter it into a spreadsheet. Check the resources at the back of the book for other electronic options. Below that, list everything you spend during a month. This will include your debt repayments (all mortgage, loan and credit-card repayments), utility, phone and internet bills, groceries, childcare, entertainment, gifts, clothes and so on. Use the money tracking you did in step 1 to help you.
Many bills are not paid monthly, so to work out an accurate monthly amount, collect your bills from the last year and add them up to get a yearly figure. If you don’t have your old bills, estimate how much you spent last year based on your current bills. When you have an annual amount, divide it by twelve to give you a monthly amount. Remember to include once-a-year expenses like car registration, broken into monthly amounts, and irregular purchases, also in monthly amounts. In the sample budget overleaf I’ve included $50 for clothes and shoes, $50 for vitamins and $25 for optical as an example of putting aside money for items that are not regular purchases.
You might want to include an amount for pocket money. It’s wise to give yourself a small allowance so you have money in your purse or pocket and don’t feel isolated or deprived. Hanno and I have $40 a month each. Moving to a simpler way of living isn’t about giving up everything you hold dear. It’s more a modification of your behaviour that results in a better life.
Our budget looks something like this:
Once you’ve calculated how much income you have in your budget, as well as how much you spend each month, you need to make sure you have enough income to pay all your expenses. As you can see in the sample budget, the income is $2500 and the expenses are $1382 per month, so we can comfortably pay our expenses with our income.
If you find that your expenses are higher than your income, go to your money tracking and see what you can cut out or cut down on to give you that money you need to balance your budget. This is where you’ll have to make some sacrifices. Even if you can cover your expenses with your income, you may still want to reduce spending in some areas so you can save more, or pay larger amounts off your debts.
Work out your savings
If you’re in the fortunate position of having money left over, work out how much you want to save and organise to transfer that money to a savings account every month. If you are part of a couple, make sure you do this together so there is a shared responsibility and a shared commitment towards your future.
It’s a good idea to give yourself a little leeway when calculating how much to save. In our case, our income is $2500 and our expenses are $1382. The difference between these two amounts is $1118, so we’ve calculated that we can save $700 per month. The remaining $418 could go anywhere. If we had debt it could be a debt repayment. At the moment, we are using this spare money to buy our solar panels. While it’s good to be ambitious with your savings plan, don’t cut it too fine, otherwise you might be tempted to dip into your savings to cover unexpected expenses.
Organise your money
Organising your bank accounts and knowing which money you’ll use to pay for which expense are essential parts of taking control of your finances. We have two bank accounts: a working account and a savings account. The working account receives Hanno’s pension and any money I earn, and we make sure we have enough money in this account to cover our bills and withdraw cash. Our monthly savings amount, along with whatever extra money we did not spend the previous month, is transferred to our savings account.
We pay our bills by direct debit straight from the working account, and withdraw cash from the same account to pay everything else. I have found this system to be very simple and effective. We know exactly how much we have for spending and we know we have money in the bank to pay the bills.
This is not the only way you can effectively work with your money. Some people prefer using a debit card to using cash. They like the convenience of plastic and the record of transactions the bank provides. If that is how you operate with your money, and it’s working for you, don’t stop.
If you decide to use the system we use, you’ll have to work out how much you need to leave in your bank account each month to pay your bills by direct debit, and how much you’ll spend each month in cash. Go back to your budget and sort your expenses into two groups: the regular bills that you will pay directly from your working account, and all the other expenses, which you will pay with cash.
The amount of money you need to pay your regular bills stays in the bank until your bills come in, then you pay them by direct debit, BPAY, or whatever your chosen method is. Make sure any quarterly or annual bills that are due in the current month can be covered with what you have in your working account.
PAY YOUR BILLS ON TIME
Make sure you know when your bills are due and pay them on time. Late fees are a waste of money. A good way of reminding yourself about payments is to mark them on your calendar or diary, or enter them in your computer so you'll be reminded a couple of days before each payment is due.
For your other expenses, the cash ones like food, groceries and fuel, you’ll need to withdraw money from the bank each month. We divide the cash we withdraw into categories – groceries, bulk food, fuel, and so on – and place it in labelled zip-lock bags. That way, we know how much we have left to spend on each category at any given time. Jars, a divided drawer, or sections in your wallet would work just as well for this purpose.
When you shop for groceries, you take the cash from the grocery money stash. If you have to pick up garden supplies o
r fill up your car with fuel, take money from those containers. Only take out what is needed and return what you don’t spend.
When you near the end of the month you may find a container is almost empty. If you need more money for that category, take it from another bag that you know will not be used that month. If you have money left over at the end of the month, put it towards your debt, emergency fund (see the next section) or savings account.
Watch what you spend in the first couple of months and adjust your amounts as you need to.
Whether you are forced to live on a small amount of money each month, or you do so by choice, it is a good idea to have some money set aside for emergencies. I am aware that this will be a stretch for some, and may even be impossible. If that is your situation, and you have absolutely no money left over at the end of the month, you can still work towards being debt-free, but you’ll have to do it without this safety net.
The unexpected does happen and most of us will have times when the dog needs to go to the vet, the car blows a tyre or the refrigerator breaks down and you have to either pay to have it repaired or buy a new one. Enter the emergency fund. You’ll have the cash to pay for your needs and you won’t have to use a credit card. The amount will depend on your circumstances and the number of people in your family. For two generally healthy people $1000 should be enough, but for a larger family, or if there is chronic illness in the family, you’ll need more. When times are tough you might also need more: when you start hearing the words ‘economic downturn’ or ‘recession’, start adding more money to your emergency fund.