Managing your Personal Finances is no different than a company managing finances. It’s all based on fixed and variable costs.
Family and personal finances are much like a company’s finances. Both are managed on fixed and variable costs. Fixed costs for your family would be the mortgage, car payments, insurance, heating, gas for the car, grocery, water and electricity bills. Variable costs might include eating out, movies, general entertainment, gym memberships, new clothes, or simply that coffee you buy in the morning. You won’t be able to completely do away with fixed costs. You’ll still have to pay a certain amount for these, but you can impact these costs and change the amount you spend. For instance, if your family only needs one car, but you have two, then eliminating one car payment is a tremendous monthly savings.
You can also change some habits, such as buying in bulk and spending less on groceries. Simple things like turning off the lights, taking quick showers instead of baths, and not running the water, also help. All of these little things can make a difference. However, the variable costs are those costs you can impact the most by changing your behavior. Not buying that A�1.00 coffee in the morning might seem like nothing, but everyday you decide not to buy that coffee is A�7.00 saved a week, A�30.00 a month, and over A�360.00 a year.
How often do you eat out for lunch or dinner? How much is that costing you and your family? The point here is not to say you should never buy anything. Rather, the purpose is to be aware of what you spend your money on, find areas to cut back on, and save money. It’s not as difficult as you might think. It simply starts with an understanding that you have both fixed and variable costs, and that you can impact both.
Take the time to write down your own list of fixed and variable costs and their appropriate amounts. After you’ve compiled your list, set a plan to reduce some of these costs. As you start to cut back, make sure that you apply the 70/30 ratio to your debt and savings. 70% of what you cut back on should go towards paying down your debt, and the remaining 30% should be added to your “pay yourself first” plan.
o Fixed costs: mortgage and car payments, heating, gas, water, electricity and grocery bills.
o Variable costs: eating out at dinner and lunch, entertainment, going out with friends, movies, coffee in the morning.
o Set up your own list of fixed and variable costs: Take the time to write down your own monthly costs. This will provide a better perspective on where your money goes.
o Use the 70/30 rule: Take the amount you are able to cut back on and apply 70% to pay down your debt, and the remaining 30% to your “pay yourself first” plan.
While this all may seem like a lot to do, it really is as simple as making smart choices. It’s simply a matter of deciding upon your priorities. The intention is not to lock yourself up in your home and never enjoy going out and having fun. However, you do need to make some concessions on how much you spend as a family. It’s not easy, but it is necessary.