Getting the Most Out of Your Budget

Budgeting, as Dave Ramsey likes to say, is telling your money what to do instead of wondering where it went. And where we'd really like it to go is into an investment account that will give you flexibility and freedom down the road.

If you've started tracking your spending and already have a budget, Congratulations! You've no doubt already discovered extra money through the act of paying attention. Dollars are like children, they behave better when someone is watching.

Now it's time to squeeze that budget and get some real savings out of it.

The Budget Triangle

These are the eternal trade-offs represented by your budget: You can trade money for time in the form of convenience, you can trade money for taste (and here we don't mean good or bad taste - we mean YOUR taste, your preferences) in the form of extravagance, or you can trade time for taste (as anyone who's stopped by McDonald's after a busy day instead of cooking can attest to).

Because of these trade-offs, especially swapping time for money, it pays to focus on the big-ticket items. Yes, you can save money clipping coupons, but that's an action (and a decision) you have to repeat over and over again. To make a big, lasting impact on your wealth, focus your energies on one-time or infrequent decisions with big payoffs.

Home/Housing

Usually the biggest item in a family's budget (after taxes at least), the opportunities for savings, especially for homeowners, abound.


If you haven't refinanced,  what are you waiting for?

Interest rates are still at ridiculously low levels, historically, and home prices are rebounding. This means if you have not refinanced in the last five years because you just haven't bothered or, more likely, because you didn't have enough equity in your home a few years back, try again. The difference between 3% (current 15-year fixed rates) and 5% on a $150,000 house with 20% is almost $120/mo - or an extra $1,400 in your IRA. Even better, you save over $21,000, or 14% of the price of the house, over those 15 years.

Warning: Make sure refinancing makes sense for you. Divide the interest savings (in our example, a $120,000 * 2% interest rate difference or $2,400/year) into your closing costs (including points) to see how quickly you'll break even. Make sure you're planning to stay in the house well beyond that period of time.

Warning #2: Resist the urge to stretch your payments out to 30-years (or even 15) if you've already paid down your loan past that point. Also, (warning #3?) resist the urge to take cash out from the refi. No payments are the best payments of all.


Get rid of PMI

Private Mortgage Insurance (PMI) is the worst kind of expense - not only do you have to pay it, but it doesn't even benefit you. If you get foreclosed on, guess who gets the payout from the PMI? Your lender! And the cost of PMI can run from 0.5% to 1.0% of the original loan balance each year or as much as $100/mo in our example above.

If your home's value has rebounded or you've paid down your balance to less than 80% of the property's value, it may pay to take the time to ask your lender about getting the PMI removed.

Warning: (there's always a warning, right?) If you have an FHA loan, don't plan on getting your PMI removed for 11 years (if you paid more than 10% down) or maybe even EVER if you paid less, unless you refinance. You can find the FHA rules here.


What if I have a lot of equity or can't refinance?

So far we've been trading a little time for a lot of monetary payoff, month after month. Here's where a lot of time and a lot of rethinking your tastes can yield enormous payoff.

Have the kids flown the coop? Can the boys share a room instead of each one getting his own? Do you really need that big a yard? To be in that school district anymore?

In short, can you sacrifice some of your current tastes (and a whole bunch of time - moving sucks) to downsize and free up a large chunk of your current budget?

If you are lucky enough to have a gain on your current home, you can likely take that tax-free if it's under $500,000 ($250,000 if you're single). That means you can finance a smaller amount of your smaller home and trim that much more out of your budget.


I rent. What about me?

Increasingly, the rental market is moving to dynamic pricing, especially in apartment complexes. This means unit rents can vary widely, even in the same building. An apartment 50 feet further away from parking could be priced $50/month less than an identical unit. The highway side of a complex could go for $100/month less. It pays to ask and be willing to compromise on taste to boost your savings.

Vehicles

Probably the second biggest purchase a family makes. You can trim hundreds out of your budget remembering two words:


Buy used.

Take a look at Edmunds.com's info-graphic on depreciation. That first mile is pretty rough, accounting for roughly 10% of a car's value. If, instead of buying new every couple of years, you bought a two-year old model and kept it for five years (a sacrifice of your preferred tastes), you would save over $85,000 in the course of forty years.


Trade down.

Do you have a year's salary tied up in your 4x4? The one you take to construction sites that gets beat up? Or your luxury car you put 60,000 mile a year on driving your sales route? Or that brand new SUV your kid just spilled ice cream all over?

Maybe it's time to cut your tastes down and with it your car payments. If everything you own with motors in them (car, motorcycle, boat, RV) adds up to more than half your salary, it's time to make some hard choices. Because all those things are going down in value every single day and taking your retirement savings with them.

Upside down? Go to your credit union (or join one) and try to get a signature loan to fill the gap. Then go get a cheaper car.

Utilities

Heating & Cooling


The smartest thing you can do to cut your heating & cooling bills is insulate your attic. Done right, you'll see the cost recouped in less than 5 years and up to a 10% saving in your heating & cooling bills that will last beyond that.

A programmable or even a 'smart' thermostat can cut your heating & cooling bills with a very quick payback and no decrease in comfort. Or you can just channel your inner Dad and 'put on a sweater'!


Phones - Smart or Otherwise

If you are still under contract to a major carrier, you are paying way too much for phones. Every major carrier now has a bring-your-own-phone discount subsidiary and there are independent carriers such as Republic Wireless that run off the major carriers' spectrum and, despite requiring you to pay full price for a phone, still saves you $70 a month after breaking even (about 4-7 months depending on the phone) versus Sprint, whose network it runs on. Another $840 a year in the IRA anyone? Of course, if you have to have the latest, greatest iPhone, that's another one of those cases of trading money for taste.

Landlines at their cheapest still run you about $45/month. Cut the cord.


Cable

Here's what you're paying $75/month for: ESPN.

You can cut the cable and get virtually everything else through a variety of low-cost streaming services: Hulu Plus, Netflix, Amazon Prime, even ESPN can be had for $20/month through Sling TV. Lose the cable.

At the very least, trade a little bit of your time to shop carriers every two years to keep your rates down. Loyalty is punished in this arena.

Insurance

Property (Homeowners/Auto)

And speaking of punishing loyalty, perhaps no one is worse than property insurers. Suffer the inconvenience of getting quotes every couple of years and making the switch if you need to.

In addition, raise your deductibles. Not only will you pay less, but you'll be less tempted to make a claim for minor losses, a move that could drastically increase your premium or prompt your insurer to dump you. While you're at it, get your roadside assistance from elsewhere (like AAA). Some insurers treat fixing your flat as a claim and an opportunity to raise your rates.

Now that you're driving that older car (see above), look to drop collision and comprehensive coverage. You'll be on the hook if it's totaled, but the coverage is often not worth the premiums (a good rule of thumb is if the annual premiums are more than 10% of the car's value, drop collision & comprehensive).

Warning: Under no circumstances drop liability coverage (it's illegal in most states).

Finally, keep your credit score high. Many insurers use your FICO score to set premiums.

 

Life  

Unless you have some overwhelming estate planning need for it (and if you're worried about THAT, you probably have plenty of room in your budget), you likely don't need whole life insurance. Whole life combines death protection with a very expensive investment component under the sales pitch of tax deferred growth, but more often than not, you end up paying too much for the investment piece and buying too much of the insurance piece.

Instead, take a good hard look at what your life insurance needs are and how long you'll need it and buy term for a much, much lower price.

Warning: Under no circumstances cancel your existing life insurance until you have been issued your new policy or you run the risk of having no coverage and being too high a risk to get anymore.

Put it all together and you can get the most out of your budget with just a little time spent mining for savings and a tiny bit of not getting everything you want right now. It's worth it in the long run.

If you're a Missouri resident and would like help with your planning, please visit us at www.comptonadvisors.com.

Compton Advisors, LLC is a Registered Investment Adviser (RIA) firm regulated by the Securities Division of the Missouri Secretary of State office. Compton Advisors, LLC does not render personalized financial, investment, legal, or tax advice through this blog. This information is for informational purposes only and does not constitute financial, investment, legal, or tax advice. This information has not been approved or verified by any governmental authority.