On the final day of Financial Literacy Month, now would be a good time to explain the proverb “penny wise but pound foolish.” So many other personal-finance blogs focus on ways to save money on things like gas, energy bills, and the ubiquitous $4 latte.
But if you’re saddled with a huge car payment, struggling to pay your rent or mortgage, or throwing money away on high-interest debt, then those savings don’t seem to matter as much to your bottom line.
In other words, if you can’t make ends meet month after month, clipping coupons isn’t going to be enough to bridge that gap.
The solution? Find ways to slash your biggest expenses first — before cutting back on smaller budgetary line items. Here are a few tips to get you started:
- Maximize your tax deductions throughout the year to avoid scrambling to remember them all when it’s time to file your annual return. Keep files on all your charitable donations, deductible interest on student loans, medical care, and other qualifying expenses.
- Aim to spend no more than 30 percent of your income on housing, whether that’s rent or mortgage (and don’t forget to factor in property tax and insurance). If you can spend less on housing and still live in a safe area, do it.
- A rule of thumb: If you have to take out a car loan you can’t pay back in under three years, you can’t afford your ride.
- Most savings accounts right now are paying around 1 percent APR in interest. If you have credit card balances or student loans to pay off, you’re likely paying more than 1 percent on that debt, so your emergency fund is actually costing you money in the long run. Make a dent in it today.
Forget fine-tuning — overhaul your budget to see the biggest savings.
One Comment
The point of an emergency fund isn’t to make interest — although one should keep it in an interest-bearing account — but to hedge against uncertainty in life. It’s true you’ll have more money in the end if you pay off the loan/balance using that emergency fund, but you’re gambling something bad won’t happen to you before you can return it to its original status after the loan’s paid off. If something bad happens and you can’t cover it with whatever remains of your emergency fund, you’re in trouble. Maybe you’re fine doing that — or maybe you’re risk-averse and aren’t.
As for me, I’m keeping mine just slightly depressed from where I’d like it to be until my loans are paid off — but it’s still a fair number of months of expenses, just in case. I can accept losing a little bit of appreciation on my fund if it means I can adapt in case of emergency.
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[...] It’s an unfortunate habit for personal-finance articles to contain unhelpful, overly general advice you have probably already thought of yourself. (For your amusement, here’s another example.) And much of the time, it amounts to little more than pound-foolishness. [...]