Options: What is “Optional” and What is Not When You Have to Cut Expenses?

I have mentioned this several times and even written a post about it specifically. People always say, “I really don’t spend anything,” or “we do not live extravagantly at all” or “I just don’t know why we cannot seem to get ahead, we only spend on things we need.” Bam! There’s the culprit… “things we need.”

I do not want clients to live a monastic life (unless they want to). I do not expect anyone to forsake all earthly delights, but in truth what you perceive as “not an option” may really BE AN OPTION.

When you look at what you spend, there are few things that are NOT AN OPTION, but that list is smaller than you think. After all, an option to one person may not be an option to another. If you ask a billionaire to give up a personal secretary, she may say it’s not an option, yet you and I may not be able to even imagine what it would be like to have a personal secretary. It would be an extravagance.

We all have to make trade-offs in life and if spending less than you earn each month, living consumer debt-free, or paying the IRS (‘tis the season) are your priorities, other things might just have to go.

Here’s a general way I like to look at prioritizing household finances and being financially secure:

  1. Spending less than you earn each month. I’m not kidding, if you do not do this, you will always have revolving debt. Figure out how much you earn and what you need to cut to spend less than you earn each month. Yes, it means less eating out and buying stuff, but it’s worth it.
  2. Pay the IRS! Seriously, folks, these guys are not joking around. If you are in arrears to the IRS, they should be the TOP of the priority list no matter what.
  3. Pay more than the minimums on your revolving debt.
  4. Contribute about 15% of your pre-tax to your retirement account.
  5. Have $3,000 (family of 4) in a Rainy Day Fund for brake jobs, root canals, emergency plane tickets and stuff that happens.
  6. Have 3-6 months of emergency savings – 3-6 times 1 month’s emergency expenses (are about 75% of typical monthly expenses)
  7. EVERYTHING ELSE including, house cleaners, food ordered from special distributors, weekends away, occasional babysitting, celebrations, private school, sports teams, season tickets, camp, renovations, new cars, and all the other “not an option” items.

Here’s what’s interesting about the “everything else” part, too: you may need a new car or camp for the kids, or pizza night every Friday. You may need to plan a wedding, take care of a sick pet or replace an appliance in your kitchen, but when push comes to shove, all of those items are options.

Prioritizing appropriately is where the rubber meets the road in financial planning. I’m suggesting you take a good hard look at your “must-haves” and “not an option” items in the face of some of the items on my list above. Can you do it cheaper? Can you delay the purchase? Can you cut the cost?

Yes, paying the IRS or Rainy Day Savings are not sexy or fun, but it does provide security and peace of mind. Security and peace of mind provide confidence and less anxiety and stress. Calm is sexy