Young American: Fixing the Problem

Via Flicker, by user Ted Percival. Used under Creative Commons License.

Our friend Young American has a problem: Though he has a college degree and a job that pays $30,000 per year, his lifestyle spending is outpacing his earnings, so he is bouncing checks and running up credit card debt. When he realizes that something is amiss, he may come to you or me for help in sorting out his finances. What are we going to do to help him?

The biggest mistake that our friend is making is that he doesn’t have a budget. Sure, he knows what some of his biggest expenses are each month (rent, car payment, student loans), but he has no idea how much his other expenses cost him each month. If we track his spending for a few months, though, and put together a budget for him (as we did here), we find that although he grosses $2,500 per month, he is spending $3,539.49 — that’s a deficit of $1,039.49 every month.

Getting a good grip on the realities of our friends spending makes a great first step in helping to solve his problems, but it’s only a first step. He has to make some difficult decisions and cut his spending. That will mean drastically reducing restaurant patronage, selling his financed car and driving something cheap, living with a roommate, ditching the smartphone and numerous other moves.

Here’s a look at Young American’s monthly spending from last time, with some suggestions about how to correct the situation:

  • Taxes & Paycheck deductions (health insurance, retirement, etc.) — $722
  • Rent or mortgage payment $500 $250 — Save 50% by taking a roommate.
  • Car payment — $200  $0 Sell the financed car and use the equity to buy something inexpensive… or just take the bus.
  • Gas (at $25 per week) — $108.33
  • Tithe — $250
  • Missions (giving to support short-term missionaries, about $150/year) — $12.50
  • Special giving (church ministries, charities, etc., at $100/year) — $8.33
  • Clothing (for the adult job and weekend fun, at $1,000/year) — $83.33  $25.00Buy affordable clothes at discount stores, and build a wardrobe slowly.
  • Lunch Out (three times a week, totaling $25) — $100
  • Dinner Out (two or three times a week, totaling $40) — $160 $80Reduce total dining out to $20/week.
  • Starbucks (two or three times a week, totaling $10) — $40 $0Learn to live without overpriced coffee.
  • Groceries ($40/week) — $160 $195You’ll have to spend a little more on groceries since you’re eating out less.
  • Gifts (birthdays, weddings, etc., at $400/year) — $33 $12.50Spend $150 each year on inexpensive, thoughtful gifts.
  • Hair Care — $20 $10Get cheaper haircuts, or go longer in between each trip to the salon.
  • Household upkeep (repairs, decor, etc. at $200/year) — $16.67
  • Car insurance — $100 $75Insurance on your cheap car will be less expensive.
  • Doctor and dentist visits (at $300/year) — $25
  • Medicine (regular prescriptions and over-the-counter) — $20
  • Miscellaneous expenses — $50 $30Live frugally to keep miscellaneous expenses under tight control.
  • Cable and internet — $80 $40Roommate pays half of this bill.
  • Movies and recreation (bowling, mini-golf, concerts, etc.) — $50 $15Go to dollar movies and other discount entertainment. After all, you’re broke.
  • Supplies (batteries, light bulbs, makeup, etc.) — $15
  • Smart phone & data plan — $75.00 $50You can’t afford a data plan. Use a “dumb” phone to talk cheap for now.
  • Utilities — $160 $80Roommate pays half of utilities.
  • Student loan payments — $300
  • Credit card payments — $100
  • Car registration/property tax ($150/year) — $12.50 $5Cheaper car means less property tax.
  • AAA Membership ($50/year) — $4.17
  • Vacation and travel (at $1,000/year) — $83.33 $20.83You can’t afford nice vacations, so spend $250 a year on cheap, small trips.
  • Christmas gifts (at $300/year) — $25 $12.50Spend $150 each year on inexpensive, thoughtful gifts.
  • Car service (regular maintenance and emergency repair, $300/year) — $25

After making some difficult cuts and lifestyle sacrifices, we’ve got Young American’s budget to balance — in fact, with this new budget, he’ll have a surplus of around $2 per month. And things will gradually get better: Since he’s not running up a credit card balance each month, he will soon pay off the credit card, giving him an extra $100 each month to use toward paying off student loans. And as he advances in his career and begins to make more money, our friend can start to enjoy some of the luxuries that he can’t afford right now.

It feels pretty easy to make these cuts on paper, for a hypothetical person. But if your spending is out of balance, it’s time to apply the scalpel to your own budget as well. I can guarantee that doing it personally will be much more painful, but I can also promise that the results will be much more rewarding in the long run. After all, if you’re not creating a solution, you’re just compounding the problem.

Up Next: Budgeting and the Bible