It is not unusual for households to experience a reduction in income. We experienced it last year as a result of the furlough of Federal employees. Certainly not a pleasant experience! However, we were well prepared with our emergency fund. Moreover, we are always proactively looking for ways to reduce our monthly expenses and continue maximizing contributions to our TSP (401[k] equivalent for federal employees) and IRA accounts.
The best way to start the reduction of your monthly expenses is to track them over a given time period. Doing so will obviously yield one of two results. Either your monthly income will exceed your monthly financial obligations or vice versa. More importantly however, it will give you a clear view of how you are currently allocating your money. In either case, particularly if your monthly expenses exceed your monthly income, you want to find every way possible to reduce your monthly expenses. There are literally hundreds of ways to reduce your monthly expenses.
The two most significant expenses in most families are related to housing and transportation. Analyzing those two areas first, listed are some reduction options with regards to housing: move into a smaller house (or an apartment), refinance your home mortgage, terminate services such as lawn care or housecleaning, cancel or reduce cable TV service, and adjust cooling/heating up or down a couple degrees as appropriate depending on the time of year. With regards to transportation: sell one car if you currently have two or more, join a carpool or vanpool, ride a bike to work (which nicely supports both fiscal and physical fitness objectives), or start utilizing public transportation.
Another significant expense for many American households is credit card debt, which is staggering. The average credit card debt per each American household is $15,799, the percent of disposable income paid to service credit card debt is 13.9%, the percentage of cardholders whose balance is over $10,000 is 15%, the percent who said their debt had increased in the past 12 months is 26%, and the average debt of a college graduate is $20,000 (Statistic Brain, 2012). I could go on and on, but my guess is that you get the picture. Debt, particularly credit card debt, is a scourge on our society and the greatest inhibitor to getting fiscally fit and successfully executing a solid retirement plan.
While it should go without saying, I will say it anyway, “stop using your credit cards!” One option for reducing existing credit card debt is to request an interest rate reduction from the card issuer. When speaking with the customer service agent, ensure that you point out your excellent payment history, which hopefully is the case, and the number of years you have been a loyal customer. A second option is to seek a credit card consolidation loan. As the name suggests, this type of loan consolidates multiple higher rate credit cards into one lower rate loan which translates to paying less overall interest while you are paying down the balance. Subsequently the loan will allow you to pay off the total amount sooner than you could pay off the same amount at a higher interest rate, freeing up money to commit to your savings and investment plan. Similar to requesting an interest rate reduction, the better and longer your relationship with your bank, the more likely you will receive an approval. To be continued…