budget — 3/38 — Beating Broke

Earning Extra Income vs. Cutting Expenses: What’s More Important?

May 8, 2018 By Greg Johnson 1 Comment

When it comes to saving money, there are two ways to skin the proverbial cat: Earn more income or cut expenses.

The option you choose depends on whether you’d rather reduce spending or work harder to pay for that spending. Both approaches will put you further ahead financially, and – if you’re serious about piling up some cash – you could buckle down and do both.

However, if you had to pick one, which is the better way to get ahead? Let’s look at the pros and cons of each to find out.

Pros of Earning Extra Income

Many people prefer the idea of earning more money as opposed to cutting they’re spending. After all, the idea of cutting back one’s lifestyle doesn’t appeal to most people. Plus, when asked if they spend money wisely, many people would agree that they already do.

Most people want to earn more money – Who wouldn’t want to increase their income? Duh! Making more income means a person has more money to spend or save. Although getting a second job is always an option, you might want to consider trying one of the best work from home jobs instead.
Plan B in case of a job loss – Taking on a side gig to earn extra income can also be a good fallback plan in case you lose your job. One never knows when they may be blindsided by a job loss, and having another way of bringing home some income is a great way to survive until you get back on your feet.
Discover a better way to earn an income – Sometimes a side gig can turn into full-time gig. That’s what happened to us. The income that we make from our blog is far more than we ever made working a full-time job. Plus, we get to be our own boss and work on our own terms.
Control over how much money you earn – Want to make an extra $100 a week? No problem! With a side gig, you get to decide how much extra income you want to make and when you want to earn it.
Chance to try out a side hustle idea – Have you always wondered if you would like freelance writing or being a dog walker to earn extra income? Rather than quit your regular job, why not try the side gig you’ve always wondered about and see if it’s a good fit? You might find something you love doing without risking your day job to try it out. Who knows? It could even take your life in a whole other direction like it did for us.
Wipe out some debt – Wouldn’t it be great to kill some debt with the extra money you earn? Or, maybe you need some extra cash for the home renovations or trip you’ve been dreaming of? Starting a side job could help you save enough money for those things before you know it!

Cons of Earning Extra Income

Too burned out from your regular job – The idea of working more in addition to a full-time job can be overwhelming for some people. If you are already burned out from your day job, a side gig may be out of the question.
No spare time – Let’s be honest: Working a side gig requires time which you may be unable (or unwilling) to give up. If you have children or other family commitments, such as caregiving for an ill family member, a side gig may not be feasible.

Pros of Cutting Expenses

One of the easiest ways to start saving money is to spend less of it.

Control over consumption – If you’d like to gain some control over the consumption monster in your household and have more money left over at the end of the month, cutting expenses is definitely the way to go. Most people want to make more money because there’s always more “things” they want to buy. However, when is enough enough? People are often surprised to find that they are just as content spending less money rather than more.
Less money wasted – Regardless of how much money you make, you work hard for it. So, letting it go to waste shouldn’t be acceptable. By taking a hard look at your expenses, it quickly becomes obvious where you’re spending well and where you’re basically flushing it down the drain on things that don’t really matter to you.
Some of the most common spending traps are gym memberships you don’t use, cable TV, landline phones, huge cell phone bills and data plans, and eating out rather than cooking at home.
More control and more time – The most important benefit of cutting expenses is that you need less money to live. Having fewer expenses may allow you to cut back to part time work, stay home with your children, or free up time to pursue a hobby. When you live on less, it frees up more time to do things other than work. You might even find that your time is much more valuable than making a few extra bucks to spend on junk you don’t really want anyway.

Cons of Cutting Expenses

Nothing left to cut back on – If you’re already living on a bare-bones budget, cutting expenses even further may not be possible. Everyone needs a certain amount of money to live, and – if there’s no fat left to trim – you may have to look for ways to make more money instead.
Unnecessary suffering – If you are already extremely diligent about spending your money wisely, cutting expenses even further may cause unnecessary discomfort. However, this is rarely the case. You must be honest with yourself. Are you struggling to meet legitimate expenses or are you simply spending too much? If you’re couch-surfing because you truly can’t afford a place of your own, cutting expenses may not help much. If you struggle to make the rent because you eat out 10 times a week, it’s time to change your habits.

So, is it better to earn more or spend less? Honestly, a combination of both is typically the most effective attack.

By spending less and making more, you’ll be able to quickly beef up your monthly savings. Your long-term savings will also improve because you’ll be able to live on less.

How do you prefer to save money? Which of these options do you think is best?

Why the 50/30/20 Rule Doesn’t Always Work

February 12, 2017 By Simple. Thrifty. Living. Leave a Comment

Most financial experts swear by the 50/30/20 Rule. According to them, you can purpose most of your income by following this relatively simple budgeting plan. While the 50/30/20 Rule works well for most people, there are times when you may want to adjust how you spend and save money.

Once you understand how the rule works, and when you should break it, you can put yourself on the path to financial success.

Understanding the 50/30/20 Rule

According to the 50/30/20 Rule, you should divide your post-tax income into three categories:

Living expenses and essentials
Flexible spending for unnecessary expenses
Savings and debt repayment

Once you have divided your income into these categories, you should make an effort to adjust how much money goes into each one. As the rule’s name suggests:

50 percent should go to living expenses
30 percent should go to flexible spending
20 percent should go to savings and debt repayment

Why the 50/30/20 Rule Works for Most People

The 50/30/20 Rule works for most people because it encourages them to use their money wisely without forcing them to spend a lot of time and energy thinking about their budgets. You may want to spend your money in a smart way, but that doesn’t mean that you want to spend hours each week going over your expenses. The 50/30/20 Rule simplifies the process.

The 50/30/20 Rule also works well because it encourages you to set priorities. If you follow its guidelines, then you will invest money in your home, decrease high-interest debt, and save money for the future. Just as importantly, you won’t spend too much money on unnecessary expenses like going out to eat or seeing movies in a theater.

When the 50/30/20 Rule Doesn’t Work

The 50/30/20 Rule makes a lot of sense, so you should follow it if it’s feasible. The Rule, however, doesn’t work for everyone.

If you live in a city with a high cost of living, then you need to budget your money differently than people who live in cheaper towns. A recent study shows that the typical New York City household spends nearly two-thirds of its income on rent. Other cities where you need to spend more than 50 percent on housing and other essentials include:

San Francisco
Washington, D.C.
Honolulu
Oakland
San Jose
Boston
Los Angeles

If you live in one of these areas, then it’s unlikely that you can keep your essential living expenses below 50 percent of your income.

Adjusting the 50/30/20 Rule to Fit Your Life

Since your city’s cost of living affects how you spend your money, you should think about that when creating a household budget. If you spend 75 percent of your income on housing and other essential expenses, then you need to draw money away from the other two categories used in the 50/30/20 rule. Ideally, you will lower how much money you spend on non-essential expenses. That way, you can keep saving money and repaying debts so you have a secure financial future.

If you plan to buy a home, however, then you can feel confident taking some money from the savings category. You’ll essentially turn the money from savings into an investment by putting it toward the cost of your home, which you can sell at a higher price a couple of decades from now.

Budgeting is important, but it needs to fit into a realistic plan that considers your city’s cost of living. It’s a good idea to follow the 50/30/20 Rule as closely as possible, but the price of real estate may force you to make adjustments.

Why you Should only use Three Categories for Your Expenses Budget

February 6, 2017 By C. Osvaldo Gomez 13 Comments

I teach an entrepreneurship and financial literacy elective to 8^th graders. I have learned that when it comes to the topic of family or personal budgets, simplicity works best. I’ve seen all sorts of budget templates online, most of them unnecessarily complex. While adding multiple categories can provide layers of detail to a household budget, it can hide or at minimum endorse, certain expenses. I teach them to simplify their expenses budget.

For the expense side, you only really need three categories: 1) Fixed costs 2) Variable costs and 3) Non-necessities. When you add categories like, Transportation, Loans, Entertainment, Utilities, Daily Living, Housing, and so on, the budget sheet takes on a life of its own. I get it, personalizing your family budget by adding columns, headings, and colors can be a ton of fun. Not! Sure, you may have been using the same budget template now for a decade and it works for you.

As the saying goes, “if it ain’t broke, don’t fix it.” I too had been using the same budget template for several years.

As you can see from the picture, I had several categories and the Excel spread sheet allowed me to sort any way I needed. I’ve seen templates with a similar style, a long laundry list of fixed and variable cost items all under an “expense” column. While this may work, it’s not going to help (as much) when it comes to making a push to save more money. After teaching my students using an example, balanced budget from PwC’s Earn Your Future Curriculum, I decided to adopt this style for my family, but not just because it’s simpler.

You don’t teach the skill of budgeting for the sake of your students knowing “how” to do it. You teach the skill so that they know “why” they’re doing it. So after the basics, I tell my students that the ultimate goal of a budget is to identify opportunities to cut spending. “Wasting money is stupid,” I say to them. “Plus the more money you save, the more you’ll have available to buy assets.” Yes, they know what assets are by this point.

The PwC template makes it easy for me to provide my students with an easy to grasp savings strategy. I ask, “If you were going to cut back your monthly expenses, where would you look to do so first?” This template is so intuitive. Of course the response is, “Non-necessities.” This is why I love this budget style so much. You are forced to differentiate your variable expenses. More importantly, you are showing yourself the map to future potential savings.

Budgeting doesn’t have to be a chore. And a budget should be a visual that doesn’t take an accounting degree to make sense of. If an 8^th grader can’t take one look at your budget and tell you where to slash, perhaps you’re making it too hard?

According to a 2013 Gallup pole, only 1 in 3 Americans prepare a “detailed” household budget. Maybe it’s because Americans dislike being detailed? What are your thoughts on household budgeting? Please share your comments below.