Are you living paycheck-to-paycheck? If so, you’re not alone. According to a recent study, 65% of adults struggle to make ends meet, and 30% say they run out of money monthly.[1] The data is sobering, considering the unemployment rate is near historic lows, and assets are rising.
Does the name Ronald Read ring a bell? Probably not. He was a gas station attendant and janitor in Vermont who passed away in 2015 with a net worth of $8 million. His friends described him as frugal, driving used cars and chopping firewood. His portfolio consisted of blue chip stocks that he owned for decades. He lived well below his means and bought high-quality stocks, critical ingredients for creating wealth.[2] Must you live a frugal lifestyle like Mr. Read to achieve your financial goals? Maybe not, but spending less money than you earn is necessary if you want financial independence.
I don’t believe there is a spending problem for most people because of the current economic headwinds of rising interest rates, inflation, food and gas prices. Prices at the pump, grocery store, and mortgage payments absorb a majority of paychecks, items all necessary to live. However, some people try to keep up with their neighbors and spend to appear wealthy, which does not end well.
Personal spending has averaged 6.57% annually since 1960; since COVID, it has jumped to 9.43% per year, a significant increase. It recently topped $18.3 trillion, and the consumer does not appear to be slowing down soon.
Credit cards are efficient financial tools, but a tool in the wrong hand is dangerous. Credit card debt recently topped $1 trillion, and with interest rates topping 22%, it’s easy to see how individuals can spiral into uncontrollable debt. According to USA Today, a household’s average credit card balance is $7,951, with annual interest payments of $1,749. In this scenario, it will take you five years to pay off your balance, and your total payments would equal $12,882, according to Experian’s Credit Card Payoff Calculator. Here is a link: https://www.experian.com/blogs/ask-experian/credit-card-payoff-calculator/
Americans love to spend money, and we are a consumer-driven economy. US Retail Sales have averaged 4.61% annually for the past thirty years, but since COVID, they’ve averaged 15.38% annually! The government pumped money into the economy to boost it, and we have difficulty turning off the spigot. And with the holiday season nearing, this number will likely increase.
Here are a few suggestions to help you with your spending and expenses.
- Track your spending through sites like Mint or EveryDollar. These sites enable you to find the good, bad, and ugly for your spending patterns.
- Create a budget or spending plan. A budget can provide targets or limits for spending and investing.
- Differentiate between needs and wants. I don’t need a new fly rod, but I want one.
- Avoid impulse purchases and shopping. Shop with a list and stick to it, and don’t let shiny objects distract you at the checkout counter. I’m a sucker for peanut M&M’s.
- Shop for the best item or lowest cost. If buying big-ticket items, look for the best deal or price through comparison shopping. Do your homework.
- Credit cards are financial staples, but using cash can help reduce your spending. Parting with my benjamins is painful when I use cash to pay for an item. Using cash may make you less inclined to buy the latte or super-size your meal.
- Automating your expenses can reduce late charges and penalties.
- Downsize your home. Tapping your home equity can free up capital to help you reduce your spending. When my wife and I downsized, we reduced the number of AC units and refrigerators necessary for our new home. My previous home required about four hours of yard work, and my current one only takes about 40 minutes, saving both time and money.
- Move to a different state. Do you want to live in Oklahoma, West Virginia, or Mississippi? These states offer tremendous value. You can significantly reduce your taxes and living costs if you move from California to Nevada or New York to Connecticut. I lowered my taxes when I moved from Connecticut to Texas.
- Delay your gratification. We live in a microwave world where we want everything quickly, but saving money to buy an item can save you thousands of dollars in interest payments. I struggle with delayed gratification because I’m impatient.
- Give money to others. Donating to charities can reduce your taxes and potentially improve your health. Despite your current financial situation, someone else probably needs a helping hand. Here is what God says about giving, “Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the Lord Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that there will not be room enough to store it.” ~ Malachi 3:10. This is the only Bible verse where God says, “Test me.”
Curtailing spending is difficult but possible, so be patient on your journey to control your expenses. I know you can do it; I’m rooting for you!
If you can count your money, you don’t have a billion dollars. ~ J. Paul Getty
October 18, 2023
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.
[1] https://www.barrons.com/articles/living-paycheck-consumer-economy-bb16b8e8, Megan Leonhardt, October 15, 2023.
[2] https://finance.yahoo.com/news/janitor-vermont-amassed-8m-fortune-140000770.html#:~:text=Read%2C%20a%20retired%20gas%20station,much%20of%20Read’s%20local%20community. Vishesh Raisinghani, August 29, 2023