How to Spend More and Be Financially Secure

By - September 20, 2014

You might make the same income as your neighbors make, spend less than they do, save more, and yet still be in a much more precarious financial position. How is that possible? What could some of your neighbors be doing differently that makes them more financially secure? It's all about the nature of your expenditures.

(Flickr photo by Theilr)

It is common advice to try to spend less for the things you buy and to set aside some money every month. Both are good ideas as far as they go. Of course how you invest the money you set aside makes a big difference in how well you do in the future.

But I'm not going to tell you about your investing options here. That's a topic for another time. I'm going to explain the difference between your fixed versus your discretionary expenses, and which ones you need to watch carefully if you want to have more financial security. I'll start with a simple story...

Penelope Pincher and Reina Lavish lived in the same city. They both worked for the local school system, making about the same income from their administrative jobs. Both had a retirement plan provided through their employer, and they each also saved a little bit extra on their own. But Penelope saved a bit more than Reina.

Penelope Pincher

In fact, Penelope was known for saving money and being frugal. She rarely went out to eat or to see a movie, and had only basic cable television service. She shopped sales and used coupons, and recycled jars to use as drinking glasses.

She had bought a big old Victorian home because it was a good investment, but it cost a lot to heat and cool. It also had a big yard that needed hours of watering weekly. Her loan payments, mortgage insurance, homeowners insurance, and property taxes were very costly. Her home was over ten miles from her job.

Reina Lavish

Reina watched a lot expensive pay-per-view television, and ate out every week. She went to movies on weekends and loved to travel. She generally didn't worry about prices when she went shopping, but she never put more on her credit cards than she could pay off when the bill came in.

She lived in a small house for which she had a small loan that didn't require mortgage insurance. Her taxes, utilities, and insurance were correspondingly small. In other words she lived large but had low fixed expenses.

Trouble Comes

One day the school cut both of their positions to part-time due to a budget crisis. Penelope and Reina saw their paychecks drop by 50%. Penelope had more money in the bank than Reina, but she used that up quickly in the coming months. Then she began to have problems paying her bills, and soon she was faced with the prospect of losing her home to the bank. She just couldn't find a way to cut her expenses enough to balance her monthly budget.

Meanwhile Reina was able to immediately stop going to the movies and eating out. She took day trips to area attractions rather than expensive vacations. She stopped buying things she didn't need. By the time she had spent most of her savings she had adjusted to living a simpler life that her lower income could support. She looked for another job to get her income back up, but in the meantime she was doing okay.

I hope the story makes it clear how important the difference is between fixed and discretionary expenses. There is a lot to be said for ordinary frugality and buying generic potato chips. But pinching pennies on the little and optional things won't add that much to your financial security. Keeping fixed expenses under control does that. Here are some things you might do to reduce these regular expenditures (in no particular order):

  • Consider total monthly costs when choosing a home to buy or rent
  • Pay off school loans as quickly as you can
  • Find a cheaper insurance policy for you home and car
  • Pay off credit card debt before you face tough times
  • Pay cash for things or use a credit card that you pay in full every month
  • Save to buy a car for cash instead of taking out a loan, because if you can afford a $400 payment you can afford to save that much every month until you can pay cash for something decent
  • Choose landscaping that requires less water. An example is a rock garden with a rose bush instead of a huge flower bed
  • Install more insulation in your home to reduce your future heating costs
  • Install fluorescent or LED light bulbs in place of incandescent ones
  • Pay down your home loan until its low enough to cancel the mortgage insurance, which usually means getting the balance below 80% of the home value, but check with your lender
  • Refinance your home loan if the new rate and payment will be substantially lower, but only if you plan to stay for at least two more years or your savings will be eaten up by the new loan costs.

There is almost no place you can find total job security any longer. If you want more financial security you have to be prepared for whatever comes your way. That's why it's so important to keep your fixed expenses low. You can be ready for potential economic difficulties while still enjoying the good times.

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