4 Ways You’re Spending Money That You Can Cut

A little known fact about government data collection: The U.S. Department of Labor collects household expense information regularly through the use of surveys.  It may not sound interesting (and it certainly isn’t), but it does provide us with some clues as to where we spend our money and where we might be able to save it when we are paying attention.

The 2009 expenditure survey, collected during the height of the Great Recession, show us where the average family is spending their money, and where they can cut it.  Think about how much you spend on the following unneeded expenses and you might be able to keep more of your money in your pocket.

1. Eating away from home. We’re not talking about bringing your lunch to work here, but you could save a lot of money if you did so.  Food is a necessity, but when you’re eating out, you’re not just paying for the food.  You’re paying for the service, the convenience, and the atmosphere.  In 2009, the average family spent $2,619 on food they bought away from home.  That’s everything from fast food trips to special dinners to your morning coffee.  That’s about 4.3% of the average household income spent on food that could have been prepared much more cheaply at home.  If you don’t think you fall into that group, consider this: If you buy a $2 cup of coffee every morning during a 5-day work week, then you are spending $520 a year on just your morning joe.
2. Clothing and haircuts. Looking nice might be important, but the average household spends $1,725 a year on apparel and fashion (or 2.8% of their income) on clothes.  Over 1/6 of that is spent on shoes.  Paying attention to your clothing costs can help you save a lot of money and stay within your budget.  For more information, check out our piece about dressing well on a limited budget.
3. Entertainment. Relaxing is important, but if you are in debt or living on a budget, think twice before you spring for those movie tickets.  The average family spent just over $2,000 on entertainment in 2009, or about 3.2% of their income.  By looking into your local community’s events and offerings, you are sure to find free entertainment: parks, playgrounds, or even outdoor concerts.  Many might consider entertainment a vital expense, but your stress levels would probably be much lower with an extra couple thousand in your wallet.
4. Miscellaneous and Cash Expenses.  A whopping $2,539 (4.1%) out of the average household budget goes towards miscellaneous and cash expenses.  What are these? They are the purchases we make that do not fall into the defined categories of food, housing, automobiles, household, apparel, education, tobacco, alcohol, gifts, taxes, etc.  These are the expenses you make that you really don’t think about and don’t keep track of.  Try to identify what you might be paying for that could fall into this category. By identifying and eliminating these expenses, you’ll be saving a lot of money.

The Pitfalls of Making Minimum Monthly Payments

If you have a mountain of credit card debt, you should stay current and always make at least the minimum monthly payment.  Credit cards are great for emergencies or large purchases, because they allow you to spread out those larger amounts over a longer period of time.

However, if your debt never seems to go away, it may be because you are only paying the minimum amount due on your cards each month.  Your credit card’s interest rate accumulates additional debt every month.  Take, for example, a case where you have $2,500 of credit card debt at 10% interest and a $40 minimum monthly payment.  The odds are great that any or all of these numbers might be higher.

At $2,500, with 10% interest and no additional purchases on the credit card, if you pay $40 a month, it will take you 88 months (over 7 years) and $3,520 total to pay off that debt.

If you can free up an additional $10 a month, to pay $50 instead of the minimum $40, then it will only take you 65 months (just under 6 and a half years) and $3,250 total to pay the debt.  That’s a savings of 13 months and $270 dollars.

The basic concept to understand is that credit card companies add interest charges to your credit balance every month.  When you pay the minimum payment, you are often paying very little of the principal (the money you borrowed) and most of your payment is actually going to pay that interest.

If you need help trying to figure out how to free that money, check out our article on 9 Quick and Easy Steps to Start a Budget.

If you’d like to figure out how long it might take you to pay off your debt, or to set payoff goals, try Bankrate.com’s Credit Card Payoff Calculator.

9 Quick and Easy Steps To Start a Budget

If you are in debt or living on a fixed income, the odds are that you have thought about starting a budget.  You may have made excuses about why you haven’t started a budget.  The task might seem intimidating or time consuming.  But follow these guidelines and it you can establish a working budget in a few evening hours.

1. Gather your bills and paystubs.  Find your recurring household bills, from utilities to rent to credit card payments, as well as your paystubs – whether they be Social Security statements, unemployment records, or wage stubs.
2. Add up your regular payments. Make a list of each company or lender you are making payments to, with the payment you are making.  For variable bills, like utilities or heat expenses, use the bills that have higher costs over the past year.  When budgeting, you do not want to leave yourself in the lurch by expecting to pay far less than your actual bill.
3. Estimate your variable expenses.  Staples such as groceries and gas may be variable, but calculate how much you spend each month in these categories, and budget those expenses.
4. Add up your regular income. Be honest. Calculate the earnings from your household.  If you or your partner have per diem or irregular hours, use a lower number or the guaranteed number of hours to calculate your income.  Do not rely on income that is not guaranteed, such as tax returns or future potential work.  Use your current income.  You need to be honest with yourself.
5. Subtract your payments from your income.  Subtract your regular and estimated variable expenses from your monthly income.  The number that you get is your discretionary spending amount, or the amount that your income exceeds your bills.  If this number is negative, you are spending more than you are making and need to make cuts.  If you divide this number by 31, you will have an estimate of a daily spending limit for things like morning coffee or entertainment.
6. Make cuts. Whether or not your income exceeds your debts, identify those expenses where you make cuts.  Unless you are on secure financial footing or rely on it for your career, you may not need premium channels on cable or unlimited cell phone plans.  Be reasonable, identify the areas where you have bills for services you do not need, and cancel those services.  This will free up more money to pay other bills or to save.
7. Pay down your debts. If you have extra income, open a savings account or pay down your debts.  By making payments on things like credit cards that are greater than the minimum monthly payment, you can pay down your debt quicker and free up even more money for your budget.
8. Stick with it. Don’t splurge. Once you have your budget, stick with it. It is easy to splurge on things you don’t need (that means things you really need) when you feel like you have more money than before.  But by increasing your savings and paying down your debts, you’ll have that money if a crisis like unemployment, wage cuts, or emergency health expenses should strike.
9. Reassess periodically. If your circumstances change greatly, it may be best to establish a new budget immediately.  But even if things seem to remain the same, it may be best to check your budget ever few months, to make sure that small changes haven’t added up or to see if there may be additional places you can make cuts.

Recent Studies on Credit Risk and What It Means For You

Two studies have recently raised questions about the credit unworthiness of those who defaulted on bills during the Great Recession and new methods of ascertaining credit risk – going beyond the basic credit score – may open up opportunities for those who faced financial hardship during the economic decline.

According to a May 2011 TransUnion study, those borrowers who limited their defaults to only their mortgages are much less likely to have future credit problems than those who defaulted on multiple lines of credit.  This apparently holds true regardless of whether new credit lines were installment loans, such as automobile loans, or revolving lines like credit cards.  Even more surprising to the researchers was that those who took out additional lines of credit further into foreclosure processes seemed to perform better at managing their new accounts than those who took them out earlier.

According to Steve Chaouki, group vice-president of TransUnion’s financial services business unit, “There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession.  This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”

Another study reported by the Atlanta Journal Constitution concluded that assessing the financial trustworthiness of consumers now goes beyond the traditional credit scores, suggesting that lenders are no longer relying entirely on the past to predict the future.

In response to the recent Credit CARD Act, lenders from financial institutions to cellphone carriers are now looking beyond the events of 2008 and 2009, where unemployment jumped from 4.5% to 10.5%, and are now incorporating potential borrower’s current assets and income into their assessments of financial stability.

For those who were hit hard by the recession, whether it be to job loss or wage cuts, this can be a good thing when looking for credit.  Those facing hardship should not let their recent hardships and debt problems weigh you down and effect their outlook on the future negatively.  The Great Recession hit a lot of Americans very hard and lenders are coming around to that notion.

Instead, focus on the present by budgeting your income to free up money to pay down and keep current on your existing debts.  When you are on more solid financial footing, credit may just be there waiting for you.

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How To Find Student Loan Forgiveness Programs

If you’ve got a hefty student loan debt, but are unable to repay it because you’re experiencing financial difficulties, consider a student loan repayment or loan forgiveness programs that will help you reduce student loans. Consider these options to find student loan forgiveness programs that you can use to pay down or eliminate student debt.

Step 1:

Discover ways to find student loan forgiveness programs for teachers through the “Student Aid on the Web” section of the Department of Education (Studentaid.ed.gov). If you have a Federal Perkins loan, you’ll qualify for student loan repayment options if you currently teach special education, teach a subject with a current teacher shortfall or work at a school dedicated to low-income students, for example.

Step 2:

Try volunteering if you’re trying to find student loan forgiveness programs and have the time and aspiration to help others, as well. You may have up to 70 percent of the student debt eliminated after four years of volunteering with the Peace Corps (PeaceCorps.gov) for certain types of federal student loans. You’ll also receive a living stipend and funds to partially repay student loans after volunteering with AmeriCorps for one year (Americorps.org).

Step 3:

Uncover a current student loan repayment or forgiveness program for medical student loans through the listing compiled by the Association of American Medical Colleges (Services.aamc.org). If you don’t find a state or federal option on the list that can assist you, consider talking to your financial aid counselor about additional options or modifications you can make to your training or practice to meet a program’s qualifications.

Step 4:

Contact the school that issued your student loan to determine if your current career and years of service qualify you for student loan forgiveness. If you received a Federal Perkins Loan, for example, working as a full-time nurse, law enforcement officer or staff member of a Head Start program may qualify you for student loan forgiveness up to one hundred percent of the loan.

TIPS & WARNINGS:

- Be sure to look into all of your student loan repayment options before selecting one since some programs may render you ineligible if you’ve already accepted another option to forgive student loan debt. If you’re seeking forgiveness for your Stafford Loan, for example, you may not qualify if you’ve already accepted benefits from AmeriCorps.

- If you can’t find student loan forgiveness programs through a qualified organization, consider additional student loan repayment options. You may be relieved of student debt if you are disabled and unable to work or if you weren’t able to finish the program because the school shut down shortly after you enrolled, for instance.