Dollars Before Cents

by Kevin on February 11, 2008

Many times in the personal finance world, we focus on the small things. Cutting coupons, getting 1% better rates on savings accounts, or using index funds to cut investment fees (and thus raise long term returns). This is all well and good; heck, you will see me saying the same things. The little things really do add up to become big things.

Ah, yes. Those bigs things.

Before you start focusing on the little things, focus on those giant, elephant in the room issues. Adding up many little things may add up to one big issue, but if you’ve got ten big issues to tackle then you are not helping yourself.

How about an example? It’s full of detail for a reason, so pay attention…

Jack brings home $2,700 per month after taxes. He lives downtown close to work, and rent on his one bedroom studio apartment runs $1,000 per month. His cable/internet bill is $150 because he just loves those movie channels. He usually spends $300 on groceries, and his cell phone is $100 each month (he just had to have the data plan for his Blackberry). Utilities usually run $150 each month as well.

Since Jack lives downtown, he walks to work every day. Yet he pays for a parking spot in his apartment’s deck, and keeps his commuter car there. His total car costs run him $500 per month.

Jack is a recent graduate with a heavy student loan load on his shoulders. His loan payments cost him another $200 per month. While in college he racked up some expensive credit card debt. He pays his minimums of $50 per month.

So it seems that Jack’s total expenses run $2,450 per month. His income is $2,700. Not bad, right? Jack is cash flow positive with $250 left at the end of every month. A little bit to save, a little bit to put toward retirement, or hey — pay down that debt!

Jack is a lucky guy. He seems to have discovered this new personal finance website called No Debt Plan. He reads it daily and has decided he wants to make some changes. Jack decides to definitely start cutting back in some areas and makes the following changes:

  • He only puts regular gas in his car, and only drives if he absolutely has to. Otherwise he walks or takes public transportation. This saves him $10/month.
  • He really goes after the sales at the grocery store . He tries to buy in bulk and make large meals so he has leftovers. This saves him $18/month.
  • He cuts the heat down a few degrees, saving him $8/month.
  • He calls his credit card company and successfully wins a reduction in his rate, saving him $5/month on his minimums.

He sits back, turns on the TV, and feels pretty happy with himself. He’s saved himself $41 each month just by these extra efforts.

But wait. Let’s look again. Jack has missed several big ways he could save…

  • Cut his cable/internet package back. Get rid of the movie channels, and all the other extras. He could cut his monthly cost down to at least $100, probably $75. Savings: $50-75.
  • Reduce the cell phone plan – get rid of the data plan unless work pays for it. Possible savings: $30.
  • Jack probably does not need a car. If he stays in the city most of the time he can walk or take public transportation. If he needs to go out of town, he can always rent a car. This is an enormous savings of $500 per month.

The total savings from these ranges would be at least $580. Jack’s original $41 savings doesn’t sound that great in comparison. His focus on the little things has made him feel great about finances. Yet if he could make some serious changes (namely, getting rid of the car expenses), he could make some serious progress.

The bottom line: tackle the big issues in your personal finance life before you really focus on the small ones. It might even save you some effort from all that coupon cutting!

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