Find an extra $9k in your budget (Budget bootcamp, lesson 1)

(Photo credit- visualeconomics.com)

The text in the article in italics represents the content from visualeconomics.com to explain the picture above. What's not in italics is my interpretation, a personal slant on how Mr. Cents and I find extra money in our budget, and how you can as well. Please feel free to share in the comments below on how the national average differs from your household!

The average consumer has a budget that is split into a large number of monthly and yearly spending. The average consumer spends $49,638 a year on a range of necessary and desired expenditures. These expenditures come out of an annual household income of $63,091 per year on average, before taxes. The average consumer owns 1.9 vehicles, and 67 percent of them are homeowners. Households average 2.5 people and 1.3 earners reside in each.


How do you measure up? It's helpful for Mr. Cents and I to see our budget in this context: we have both a smaller household and a larger household income. We own our home (usually owning is more expensive than renting), and are a dual income household with 2 cars.

Side tip: for beginning budgeters, I don't recommend using pre-tax income as a tool - it's much easier to plan expenses based on your take home income.

The largest expenditure of the average household is housing. This takes up an average 34.1 percent of the yearly budget of households. This is an average of $16,920 spent on housing. This amount includes $10,023 spent on shelter, $3,477 spent on public services and utilities, $984 spent on household operations, $639 spent on housekeeping supplies and 3.6 Percent spent on household furnishings and equipment.


Spending $10k a year on housing adds up to a $833 monthly mortgage payment, which is far less than average for areas with a higher cost of living. A key observation here: typically banks will approve the amount you can spend far in excess of this percentage of income. Banks base "how much can I afford" numbers on a range of 28-36% of PRE tax income, NOT including things like utilities, household maintenance and furnishings. Mr. Cents and I spend about 15% of our post tax income on mortgage costs alone in a mid- high cost of living area (Chicago). Utilities can vary widely between areas of the country, for us the amount we spend is less than the US average of $290 a month. To determine your budget on a new home, it's best to get advice from the current owners or your real estate agent before purchasing a home.

How can you cut back here? Let's assume your mortgage and utilities are fixed costs, and short of refinancing and using candles for light, there's not much you can do to change those expenses. But what you CAN do is focus on expenses that are within your control: do your own landscaping, cut back on the toxic cleansers and make some of your own, cut back on the expensive mulch, fire your housekeeper. Cutting the categories of household operations and housekeeping supplies can really add up quickly. Yearly savings: $800

Additionally, you can drastically impact your budget by eliminating most of the household furnishing expenses. Postpone replacing your living room sofa for another year or consider buying a gently used lawnmower on Craigslist. Yard and estate sales occasionally have treasures for a fraction of new cost. Yearly savings: $1500+
The second largest expenditure for the average consumer is transportation. The cost of vehicles purchased is an average of $3,244 per year, making it 6.5 percent of the average budget. The cost of oil and gas for vehicles costs the average consumer $2,384 per year, for an average of 4.8 percent of the total yearly budget. Combined, the cost of vehicles and their maintenance costs consumers an average of $8,758 per year. This is a total of 17.6 percent of the yearly budget.


Oh, transportation - how much better off we would be financially if we had an advanced public transportation system like they do in London? Aren't car expenses fixed like housing though? Not necessarily. Let's say this average spend was based on one member of the household purchasing a new car every 5 years. If we spend more to keep cars maintained and elect to keep our cars 10 years, this would reduce our yearly expenditure by 50%. Shopping around for a lower priced, reliable mechanic as opposed to the dealership wouldn't hurt either. Yearly savings: $1600

Another large expenditure is healthcare. The average consumer spends $2,853 on healthcare each year. Another physical necessity, food, costs consumers an average of $6,133 per year. An average of $3,465 of that is spent on food that is consumed at home, and $2,668 of it is spent on food consumed away from home. Combined, the money spent on food is 12.4 percent of the entire yearly household budget.

Whew - 12% of a household budget is a big number. I bet you can see ways to immediately cut that percentage - ideally cutting back on unnecessary spending (meals out of the home). Food is a necessity, but even the necessities have room to cut back. Taking a closer look at those numbers, the average family spends $526 monthly on food - both in and outside of the home. Budget tip - taking more meals from home and target your spending on food to an average of $400 a month. Yearly savings: $1500.

Insurance and pensions are important financial considerations and they cost the average consumer $5,336 per year. This is a total of 10.8 percent of the annual budget. $5,027 f this, 10.1 percent of the yearly budget, is spent on social security and pension contributions. In addition, the average consumer pays an average of $309 each year, making up 0.6 of the annual budget.

This is a category Mr. Cents and I don't really have much ability to impact and also don't usually consider this even as a factor in our budgeting. After all, our social security expenses are part of our taxable income and we never even see that money. There's not much you can do to impact this category, unfortunately.

Other expenditures include a yearly average of $945 spent on education, making up 1.9 percent of the annual budget. Consumers pay an average of 3.8 percent of their annual income, $1,881, on clothing and related services. Personal care items add up to $588 per year for a total of 1.2 percent of the annual budget.

Clothing is a necessity, as are personal care items like hairdryers. But nearly $600 on personal care items? Drugstore necessities like shampoo are added into our food bill, and we choose to buy quality items that last for years. Personal care could easily be cut to less than $200 this way, saving the average family about $400. And although I'll be the first to admit how much I love clothes, you can easily cut this category as well by thrifting and requesting clothing items as gifts for birthdays and holidays. Mr. Cents and I spend $50 a month to maintain our professional wardrobes, and could tighten this area even more if we were shopping frequently at resale shops and garage sales. The average family could easily cut down this category without feeling much strain. Yearly savings for clothing and personal expense reductions: $1600.

Entertainment costs $2,698 yearly, making up 5.4 percent of the average consumer’s income. Purchasing reading materials makes up 0.2 percent of the average income, or $118 per year. The average consumer spends $1,821 per year on cash contributions. This makes up 3.7 percent of the consumer’s annual income.

Mr. Cents and I are huge library fans. Our library saves us much more than the $118 per year, as we would be spending 10x that amount if we had to buy every book we read. Additionally, there are ways to cut down your entertainment expense from places like groupon.com, entertainment.com, and researching free things to do in your city. You could easily cut this number in half, even more if you're a family focused on doing community event rather than a young urban couple with no kids.
Savings in entertainment - at least $1400
Alcoholic drinks cost an average of $457 per year, or 0.9 percent of the budget. Tobacco and related tobacco supplies cost an average of $323 of the average consumer’s budget, for a total of 0.7 percent of the yearly income. Miscellaneous expenses make up the remaining1.6 percent of the budget with $808 per year.

Quit smoking. You know it's bad for you and it's expensive. You don't need me to tell you that. Ditto alcoholic drinks - save the drinking for home or push the alcohol back into your entertainment budget. Miscellaneous expenses can be cut at least in half once you become more aware of your spending habits. Cut your own hair if necessary, trim back on the gifts. Hey, we're all feeling the pinch in this great recession.
Yearly savings - $1100.

I hope these tips are relatively painless, and you learned at least a couple things that help you make cents. Remember, budgeting and cutting back expenses is a gradual process, one which only gets easier over time.

Making a living vs. making a life – a study into Common Cents FAQ

A few days ago, Mr. Cents and I visited with a close friend, Mr. Moneybags, who asked for help with his financial situation. The why isn’t important – this has been just one of many friends who’ve asked our financial advice. Perhaps it is because of Mr. Cents’ flirtation with financial planning, perhaps it’s the blog, or maybe it’s just because we make it look easy. But I can assure you – it only LOOKS easy. Like marriage, you have to have a plan and work at it. Yep, I am talking about living beneath your means and (gasp) following a budget.

Building the case for the value of living on a budget, Mr. Cents explained our financial situation to our troubled friend: When Mr. Cents and I started dating over 4 years ago he had over $75,000 in credit card debt, auto loans and student loans. By diligently following a budget, Mr. Cents managed to pay off over $60,000 in consumer debt in the past 4 years, including the entire credit card balance before we were married. These days, we still continue to budget but instead have a home, two cars paid off in full, minimal student loans and save a significant part of our salaries for retirement. Life is good!

Enter criticism reel into the conversation, aka why what works for you won’t work for me.

Moneybags: But you guys make more money than I do, so it’s hard to compare.

Cents: The foundational concepts we live under – spend less than you earn, etc. - are applicable to anyone. Besides, we have a much higher cost of living and need to support 2 people. Double income but also (in some cases at least) double the expenses.

Moneybags: I can’t possibly have a budget line item for milk (enter sarcasm). A zillion budget categories are just out of the question.

Cents: Not everyone is a strict category budgeter, but that’s something that evolved over time with us. At first, our budget was nothing more than knowing which bills needed to be paid when. The categories are actually based on our spending over time. All the categories do at this point is help us predict income and expenses. We live off of credit and debit cards so everything in the budget is already tracked for us. It’s really not as hard as one might think over time. But even if you don’t want to use an electronic system, there are plenty of other ways to budget. Some people like to use a cash envelope system; some people spend 60% of their income on fixed expenses and the remainder on variable costs/emergency expenses. There’s something for everyone, the bottom line is increasing your worth over time, rather than increasing your amount of stuff, which usually increases your debt.

The conversation goes on like this for a while, and finally Mr. Moneybags came out with a ringer: “What if you died tomorrow. Wouldn’t you have a lot of regrets? If you aren’t doing the things you want to do you aren’t living in the moment.” The answer got its justified answer after much introspection.

Cents: If I died young or was permanently disabled early in life I might wish we had done a few more things but I really don’t miss out on anything by sticking to a budget. Overall, we have a very satisfying lifestyle and are content with life. Because we can plan for things in the future and there is flexibility in the budget, it takes the edge off anything material. And the fact that we are now financially secure and have money in the bank to prepare for any kind of emergency is much more valuable than anything we could buy.

I’ll admit that occasionally I feel deprived when I have to tell myself not to buy something ($300 Coach leather satchel, why do you tempt me so?), but that feeling is less and less all the time. While I do support the idea of living your life to the fullest, my idea of fullest sometimes changes over time. I’ve actually never had the mindset that I might die tomorrow so I need to buy x today. Sometimes we have to go over the budget, and that’s ok. Better to have a life well lived than feeling financially deprived ALL the time. On the other hand, it’s also helpful to make sure that I’m consuming for the right reasons, not just shopping without thinking about it. Financial security keeps me motivated and is a much better feeling for all the time instead of living for just in case. After all, the $300 bag is not going to help me sleep any better at night.

Why do we fall?

It's been a particularly challenging week. Last minute travel for work coupled with a slew of birthday and graduation parties has taken it's toll, leaving little time for simple pleasures like curling up with a book, cooking or writing.

I thought I'd share a little progress on my commitment to write an hour a day: I traveled for work this week and did not once even attempt to write Monday through Thursday. My trip was particularly stressful and my writing at those times is often convoluted or clouded with negativity, so I opted to avoid writing all together. If I ever hope to be a serious writer, I'm going to have to overcome the challenge to write during stress. After all, to say my "normal" life is absent of stress is far from the truth. But I'm not giving up just because I wasn't able to meet my commitment this week. In fact, now I'm even more resolved to stick with my writing. If only I had someone to help with all my other commitments….

Making any significant change successfully has a lot to do with self reflection. You will fail - likely more than once - more likely much more than once. The list of people who have achieved something significant on the first try is very short - if it even exists (believe me, I looked). This is true for a multitude of creation, from developing the light bulb (thanks Thomas Edison) to developing a working budget. So, since this is a blog about money, let's bring it back to something relevant to personal finance...

Mr. Common Cents and I analyze our budget every month. It's not that we continuously go over budget, (after all, we have been analyzing our spending for the past year). The reason we look month after month at categories like groceries, gas and gifts is because life isn't always constant. Sometimes, life gets in the way of our budget. It's during those times that we look at our spending and find ways to work our goals into our lives. We ask ourselves serious questions for the things we spent money on:

Did this category meet our expectations?
If it did, what can we learn? If it didn't, what happened and what can we do differently next time? (This month, we will end up over budget on gifts because of the aforementioned celebrations, as well as an upcoming wedding. Although it's more than we generally spend, we will likely still end up meeting our annual budget goals.)
Do our expenses reflect our values?
At the risk of sounding cliché, you really can tell what your priorities are from your calendar and your wallet. (Showing appreciation to loved ones is important to us. Over the last 4 years, we've learned to find other creative ways to show our love, but with a large family we still have a minimum amount of gifts we are willing to commit to.)
What can we do to prepare for next month?
This question is a culmination of the answers from the previous 2. (With the gift budget, we can continue to find creative ways to show our loved ones how much they mean to us. Sometimes this means spending a lot more time making a personalized card than picking it up at Hallmark. Sometimes, this means shopping on Amazon for something we know they will love.)

Life happens no matter how many contingency plans we've made to prepare for the unexpected. Sometimes, we have to learn to roll with the punches. It's at those times that we realize why we failed in the first place… but I'll let someone else say it better:

I'm learning to pick myself up again. Life is so much more fulfilling when our mistakes have a purpose - to teach us what we're really here for.

Our 7 Rules of Money Management

Occasionaly, Mr. Cents is extrodinarily supportive. Hence his decision not only to support me in the blog, but to contribute as well. I can't necessarily call this a "guest" post, because as I called the blog Our Common Cents, it applies to both of us. (Also, I am not-so-secretly hoping this is just one of a number of posts we will write together.) Needless to say, Mr. Cents' infinite widsom follows...

I (Mr. Cents) have been staunchly of the belief that money management is something of a common sense thing and that anyone in the death-spiral of debt is an idiot (I was included in this classification a couple years ago as well, and yes, I was an idiot).

My wife seems to think otherwise and has since made a *cough* blog *cough* in hopes to spread our good “cents” of money matters to other people around us.

I think, “Nobody gives a rat’s @$$ about what we think!”

She’s a bit more optimistic.

Anyhow… she convinced me to write up some of our thoughts on finance and she would post them for everyone to gawk at. If you have something else that works for you, great. Share your thoughts.

Our Seven Rules to Managing Money

1. Have Goals
2. Have Plans
3. Have a B Word
4. Follow the B Word
5. Keep Evolving
6. Be Honest
7. It’s Okay to Say No

1. Have Goals
Without a goal, you’ll never know where you’ll end up… The same can be said financially as well. Everybody should have some manner of financial goal in mind, and these can be driven by any number of factors be they altruistic or selfish. It is important though to keep these goals realistic, specific and current. Keeping your goals lofty yet within reach helps you stretch for something, yet not fail each time you try.

Specific goals are also used instead of vague one such as, “I want to be rich!” By avoiding subjective terms, you define your goals more accurately and can then judge how close you come in their achievement. Finally, by keeping your goals current and updated, you ensure that your budgets and financial decisions keep you on the path you wish to be on.

2. Have Plans
Without goals, there are no endings, and without plans there are no means to those ends. Plans enable us to take a step-by-step approach to achieving our financial goals and allow us to measure our progress along the way. Interestingly though, you should have multiple plans being enacted at any one time as you most likely have multiple goals you wish to accomplish.

While these plans might be as simple as a three step process to buy a vehicle in the next four years, they could be a complicated investment strategy to allow for overall financial independence by the time your 55. Either way, without these plans, we flounder around in a pool of meaningless numbers and often times waste precious little time trying to figure out what to do.

3. Have a “B” Word
Budgets are the necessary evil of personal finance, however they don’t have to be likened to torture as they often are. A properly made budget will not only safely guide people through financially troubling waters, but will also show you where you really spend your money.

Most people have not a clue as to where their money goes each month and are truly surprised when they have little money saved up. Unfortunately, as income increases throughout our lives, expenses have a tendency to as well. Budgets can minimize this affect or at least allow one to allocate this extra income in the most effective manner possible.

4. Follow the “B” Word
Having a budget is completely different than following a budget. This is what separates the proverbial “men from the boys” in personal finance. If a person isn’t able to track their spending throughout a month, then the budget they struggled so much to build means little. But don’t fret, there is hope in many forms now.

Following a budget in today’s world is easier than it ever has been what with the proliferation of new financial tools and programs such as Microsoft Money, Quicken, online banking, online credit card access, direct deposit and more. Using these tools means that personal finance, including payment of all bills, can be accomplished in little more than an hour a week and with few headaches. The tools are there. Use them!

5. Keep Evolving
In following all of the above advice, a person will often find they have more money, more financial freedom, or both. The accumulation of more money, income or investment opportunities means that goals, plans, and budgets will need to be revised over time. You may find that your goals will change, thus requiring revised plans, and in turn, these make you change your budget as well.

This is a natural progression in your financial life and should be welcomed. You will find that your budget will become a living, changing, evolving part of your financial livelihood, but in stunting this evolution, you will be inhibiting your overall financial growth as well. Don’t stifle this development, encourage it.

6. Be Honest
Financial matters are not meant to be secrets. Contrary to belief, you should not feel ashamed, appalled or intrusive by inquiring about the spending habits of your significant other (or yourself), especially if these spending habits affect the financial security of everyone else. Meaning, everyone involved needs to be informed, and above all, honest with each other.

A husband should know about the spending habits of his wife, just as a wife should know of the spending habits of her husband (and both of their children if any). Tiny details need not be delved into (as we will discuss at a later date), however the transaction amounts and categories need to be revealed honestly if you are to accurately follow and maintain a budget throughout your life. Bottom line, be honest and open, and keep everyone involved informed.

7. It’s Okay to Say No
Finally, with all of the financial crises of today (the credit crunch, the sub-prime mortgage mess, the end of social security, the increase in health-care costs, personal spending increasing, personal saving decreasing, etc…) it’s vital to know the most important lesson in personal finance… It’s okay to say no, especially if you can’t afford it.

You don’t have to keep up with the Jones’, especially since it’s most likely that they can’t even keep up with themselves. By the Jones’ I mean families that are spending way beyond their means and due to jealousy, envy, embarrassment or pure stupidity, their neighbors trying to keep up and are following them straight into the depths of financial oblivion because they can’t say no to their own impulses. This in turn makes the Jones’ need to spend more to keep up with their neighbors, driving them further into debt, and then their neighbors again spend more to keep up with the Jones’, etc… It’s a never ending deadly cycle that leads to world-wide devastating events such as recessions and diving economies, all because people can’t say “no,” or at least “not yet”.

In summary, you can’t spend more than you make and expect everything to be okay. Period. Let someone else commit financial suicide. Keep an eye out on your own financial matters and don’t be swayed by the stupidity of others.

We hope this makes cents (that is probably the worst pun I have ever made)…