By Steve Kautz, former Maine mathematics teacher and personal finance expert.
All that talk last week about fitness made me think about my gym membership. When I re-activated my monthly membership this past weekend, it got me thinking about another aspect of budgeting. That is, the importance of looking at expenses on an annual basis rather than just monthly. So for my colleague who mentioned her gasoline budget, this one’s for you.
If Only There Were Fewer Months in a Year
One of the biggest personal finance traps in America is the “how much is it per month?” phenomena. We buy a lot of stuff based on that question. The obvious one is car payments, but there are many items in our budget that we could, and often should, be analyzing on an annual basis (or, in the case of a car, the total cost) before we decide whether we can afford them. Of course, businesses know this and appeal to our collective soft spot for monthly payments. Listen to the big, LOUD, game-show host voice:
“Buy now and pay only $99/month, that’s just $99/month plus no money down! And we’ll throw in a 72′ flat screen TV for the first 100 customers who are gullible enough to think we’d actually give something away for free!
We are constantly bombarded by offers like this for everything from furniture to cable TV. And I probably gave in to all of them at one time or another in one of my previous financial lives – been there, overpaid for the t-shirt.
It All Started with Not Having a Cup of Coffee…
In the coffee analysis last week, we saw the power of a saving a few bucks a day, which leads to a few more per month, and a bucket full of cash when analyzed over many years. It’s a good idea to apply that same type of analysis to other, relatively small items in our budgets (we’ll save car payments for another day as that deserves 500-1 million words of its own). For example, how about your cable or satellite bill? According to Businessweek.com, the average cable bill in the U.S. is $80/month. That’s about $1000/year. Yep, here we go again. Maybe your bill is only $45/month. But that is still $540/year. If you are looking for a little extra money for your retirement fund or your child’s education fund, then look at trimming things like your cable bill and dumping that savings into something that is working for you.
Some Other Likely Suspects
You might be thinking that you can only trim $10/month from your cable bill – no big deal, why bother. Rather, ask where else might a few more $10 tickets be hiding. Put a few together and now were are talking tens thousands of dollars over 20 and 30 year periods.
- Subscription services like Netflix or Hulu – Do you have both? Do you need both?
- Home phone – Yes, they are still out there. That could be running $30/month or more.
- Internet service – Some of us do not really need internet service at home. If you are already paying a premium for smart phone service with unlimited data…
- Insurance deductibles – Raising your home and/or auto deductibles by just one level (i.e. $250 to $500) can net you a few more dollars a month.
- Gym memberships – I’ve probably heard this 100 times in the last few years, “Yeah, I pay x dollars/month for the gym but I never go.” I think, “Yes, x dollars, you are using algebra. That’s nice.”
The idea is that although any one of these items might not make the difference in helping you retire before your kids do, if you pick and cut a little from several areas all at once, plus the money saved by changing your coffee habits, you can be talking about significant monies.
Is “monies” grammatically correct? I don’t care. Sometimes I just like saying “monies.” As in, “Buy some stock in that company, you could make some serious monies.” Or, “Watch out for that place, if you go in there you will drop serious monies.” And, of course the ever-popular, “Can I have some monies?”
As with most of these topics so much depends on your situation. If you are struggling right now to balance your budget, trimming isn’t really the way to go – cancel the cable! But if you are anywhere from just starting out to saving but not satisfied, take a close look at every item in your budget. Do yourself a favor and look at everything from an annual basis. Then trim a little and look at the savings in the same way. For every $25/month you can find ($300/year) it’s about $10,000 over 20 years at a 5% rate of return.
Fascinating and Meaningless Stat of the Day
By the way, my last entry also got me thinking about how Americans stack up to other countries in terms of coffee consumption. Drum roll, please… according to Euromonitor International, The Netherlands kicks the world’s buttocks in this area, drinking 2.4 cups/ day. The next closest country is Finland at 1.8/day. The USA? Average. Just 16th in the world at .93 cups per day. My friends in the Czech Republic come in at an average of 1.2/day, and the Spanish are 28th at just around a half a cup per day.
Hope you are starting to like numbers, too.
The views, information, or opinions expressed in this blog are solely those of the author and do not necessarily represent or reflect those of the Maine Jumpstart Coalition for Personal Financial Literacy.