Several readers of my blog have asked me how to live off their salary, and often they feel like their salary is never enough. In fact, my second most visited post — how to live off $40,000 — lists ways one can make the most of a dollar. But the questions continue, so I thought I’d put some research into assembling a framework that can be applied to any salary.
Let’s look at your basic needs:
- Food – About 15% of your budget should go to food according to the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. Going to the grocery store will always be cheaper than going out to eat or shopping a convenience store. A friend once told me they thought Wendy’s was cheaper — they could buy a potato with chives and sour cream for just over a buck. Except a potato cost far less than $1, chives can grow in your back-yard, and sour cream can be spread over a number of dishes. Avoid confusing convenience for necessity.
- Shelter – U.S. home ownership first soared past 50% after World War II, to peak at 69% in 2004. But even then, it was after many years of savings (80% of those aged 55-64 own, while 41% under 35 own). Now, many of us expect to own a home in our 30’s, or even 20’s. Rule of thumb is that a mortgage should be no more than than 2x – 3x of your gross annual salary. Many lenders assume 3x when giving you a loan (or did, perhaps that has changed in the recent years). So if you are single making $50K, your mortgage should be no more than $100 – $150K. If that seems like not much of a house, then rent while you save for a down payment. If you are concerned that you are “losing” money renting vs owning, consider that the average return on a house is 6% while the market from 1970 – 2000 returned 10.2%. If anything, you are losing potential by placing money into a house (don’t forget repairs). Don’t be in a rush.
- Clothing – It’s amazing how long clothes can last when you don’t run it through the washer or worse dryer every wear. And if you are working a white-collar job, you probably can get many wears out of a pair of trousers or a skirt. Watch for sales. Learn how to sew to mend.
- Savings – It’s probably strange to see savings as a necessity, but if you don’t have any savings you can’t handle a job loss, health issue, or provide after you are unable to work. Which means you can’t take care of yourself or your family. Savings are a necessity — the more you can save, the better.
Everything else is discretionary. Seriously.
But what about the car, phone, TV, internet, cell, cable, vacation, etc, etc? I’m not saying don’t have them, but I am suggesting that because they aren’t necessary, spend your money frugally on them. If you want a car, don’t buy new and get something you can afford (rule of thumb: 10% of your monthly income should go to transportation). If you want a phone, look into how you can turn your existing internet connection into a phone and phone combination.
Think of it this way — if you were fortunate enough to go to college, remember how you lived back then? Revive some of those strategies.
Or think of it this way — the average household income is $48K. If half of the population in the wealthiest country in the world can do it, so can you.