Building a cushion

Returning to the topic from a couple of days ago: 

Building a cushion for emergencies isn't magic, but it does take discipline. The first requirement is that you have to get your expenses down to no more than your income. Be realistic. Don't budget $75 for your utility bill when you know it's going to be at least $150. Then you have to push your expenses down, or your income up, at least a little.

If your family income is at least moderate, this shouldn't be too difficult. Look at discretionary spending first (i.e. do you really need to pay for that cell phone package that lets you get infinite downloads when you already have ordinary internet access? How about that $4000 cruise vacation instead of spending a few days in a nice hotel for $500?) Then look at "soft" expenses such as food and utilities. And while most people seem to rule out "hard" expenses, such as mortgage/rent and car payments. I think these expenses should be evaluated too. Do you really need a 5 bedroom/3 bath house when all the kids have left home? If so, can you take in a lodger or two to put some of that extra space to use? Aim to reduce those minimum monthly expenses to 80% or less of your take home income.

If your minimum monthly expenses are $2000, your ultimate goal is $6000. Don't panic, though, you can do it in bits, and the more you have saved, the more you'll be able to save (more about that later). Assuming you have a take home income of at least $2500, you should be able to put aside $100 a month ($25 a week) without a problem. PAY your savings first, just like it was a bill, then pay your basic expenses. Then pay your basic bills. You should have about $100 a week left for emergencies and entertainment. In just over a year and a half, you'll have $2000 for the first month's expenses saved.

Now, a brief detour for those with consumer debt. Do NOT touch that $2000 except in genuine emergency (replacing the big screen tv is not an emergency, by the way). Let it accumulate interest. Begin paying off your consumer debts with that $100. There are two main approaches. One pays off the smallest debt first, the other pays off the one with the highest interest rate first. Both have advantages, but although I generally favor paying off the high interest debt first, many people find that the thrill they get from completely paying off the smallest (fastest) debt motivates them to keep going. Whichever approach, apply that extra $100 to a single debt. When it's paid off, apply the $100 plus the minimum payment you were making to the next debt. If you have multiple credit cards, get rid of all but the one or two with the best terms. And by the way, if you have a lot of consumer debt, you really should consider taking at least $100 of your spending money to apply to this.

Once you're up to at least $200 toward the consumer debt, start putting $50 a month of that money into your emergency savings again. If you had no real consumer debt, continue putting your $100 a month. In just over 3 years, you'll have 2 months of emergency funds. In 4 and a half, you'll have the three months of emergency funds.

Want to get there faster? Put 10% or even 20% of your income into savings. At 10%-$250-you'll have the first month's expenses in 8 months. At 20%-$500-you'll reach that goal in 4 months. But don't cut yourself too short unless your consumer debt is high or you're concerned you may need that money soon. Remember you'll be gaining interest as well.

Now, how does savings make it easier to save? Say you have that $2000 saved up, and you're whittling down your consumer debt, and your car breaks down, a $800 repair bill. Without savings, you'd have to put that repair on the credit card. At $25 a month, it will take about 40 months to pay it off and cost about $1000 total. That same $25 a month put back into savings replaces the money in about 32 months, and gains interest at the same time.

If your take-home income is closer to $5000 a month, as long as you don't live someplace with an unusually high cost of living (i.e. NYC, Los Angeles), you ought to be able to get your basic expenses down below $4000 a month, at least temporarily. Save at least 15% of your takehome, $750 at $5000, and in 5 months, you'll have the first month's savings.

This may sound depressingly "poor", but it's really the opposite. If you can free yourself from debt, you'll be amazed at how much extra you have in your budget. And when you have savings, you have much less stress.

For those who are already near the edge, find even $25 a month to save. And cut expenses to the bone. Cut out sodas entirely, and that could get you $40 a month or more alone. Turn off the cable. Turn off the land line for the phone and get a single pay-as-you-go cell phone that stays at home to be used only when completely necessary. Sounds too harsh? If you're REALLY so near the edge that you can't save any money, then those things are luxuries. If you've already cut genuinely cut everything you can, find ways to make even tiny amounts of additional income. Ebay things, babysit, whatever it takes to make an extra $25 a month. In a year, you'll have $300. It may not be a huge amount, but it's a start.

Casseroles

Casseroles are not nearly as complicated as people tend to think. And you don't need a recipe, just a knowledge of combining ingredients. You basically need:

About equal amounts of:

cooked meat

starch (you can replace with a second vegetable or something else if topping is starchy)

vegetable

something to hold it together (cream soup, sour cream, plain yogurt)-you may need as much as twice as much of this

Plus:

toppings (cheese, crushed crackers, biscuit dough, hashbrowns, mashed potatoes)

seasonings

This is a great way to use up leftovers, as long as you keep in mind what tastes well together. Shepherd's pie is a layered casserole, but most of the time, you'll mix the first four things together in a greased dish, season, and cover with the topping.

Had turkey and stuffing last night? Dice up leftover turkey, dice some carrots and onions, mix together in a greashed casserole dish, pour diluted cream of chicken soup over it, season with salt, pepper, and garlic salt, and cover with stuffing. Bake for 30 to 40 minutes (longer if a large casserole) at about 350F. You can also sprinkle cheese over the top of the stuffing.

If you top with mashed potatoes, the casserole should be done when they begin to brown. If you use biscuit dough, insert a knife into the center to make sure the dough is cooked through.

You can make a pot pie in much the same way. Use a nice, deep dish, mix the meat and several vegetables, and add a thick broth. Cover with biscuit dough.

You can also make non-meat casseroles that rely on legumes for the protein, but that's trickier. Unless you use pre-cooked beans and peas or fast-cooking split peas, the topping will probably be overcooked by the time the beans are done. I prefer slow-cooked bean dishes to casseroles.

Cushions

No, this isn't about making new cushions for your couch. This is about a "cushion" in your budget. I think everyone should know how much they need, at minimum, to get through a month (rent or mortgage, minimum payments on CC, food and gas) and have at least 3 months worth of expenses saved in some accessible form. Why? This is your "cushion," what you "land" on if you suddenly lose your job or have a major unexpected expense. Even better, have 3 months in a safe, relatively liquid form (i.e. some sort of savings account) and another 3 to 9 months in something safe you can tap into in an emergency (i.e. CDs).

I hear lots of arguments against this. One is the bizarre idea that savings takes money out of circulation. Bull. Banks do not take in your money and store it in a vault somewhere. They reloan that money at a higher interest rate to businesses and new home and car buyers. If anything, you're stimulating the economy by making this credit available. 

OK, so you didn't spend it on consumer goods, so you didn't stimulate the economy that way. What a hypocritical argument that is, making spending money with a corporation into a patriotic act! Does that argument work both ways; do corporations line up to show their patriotism and loyalty? Ask yourself how many of their jobs have left the country, and how much tax do they actually pay? How many executives collect obscene bonuses when their companies lost money or laid off ordinary employees to "cut costs"? If you spend $500 on one of their gadgets this month, do they line up to help you out next month if your car breaks down?  Then decide if patriotism comes into.

Another argument is inflation. Maybe. However, I've looked at how they calculate inflation, and it is not a measure of basic costs of living. In a lot of ways, prices are a crap shoot. You buy 50 lbs of rice this month for $.45/lb, thinking you have a great deal. Then two months from now, a bumper harvest comes in or some corporation turns out to have hoarded rice to push up the price, now dumps it on the market, and the price drops to $.30/lb.

A lot of people tell me, oh, I'll just put a major expense on my credit card. Wow. You know, credit card companies now give you clear numbers on your statement showing what you pay over the life of the loan. Pay attention to it. The loan you get through a credit card is EXPENSIVE. I have one credit card, and that's all I want. I pay off the balance every single month, and in almost 11 years, I've only carried a balance once, in special circumstances, for about 4 months.

Why have some savings? Well, you go to work tomorrow and discover your employer closed down over the weekend. Time to apply for unemployment. In Texas, if you were making about $2500 a month on salary before taxes, you'll get a whopping $306 per week in benefits, or about $1300 a month (I multiply weekly by 4.3 since there's an extra week about every three months). Your after tax take home pay was about $2200 and say your basic expenses are $1900; the difference between unemployment and your expenses is $600. If you're well paid, keep in mind that the maximum weekly benefit in Texas appears to be $415. If you're an engineer making $80,000 a year, your income is going to drop dramatically to about 1/4 of what you were making.

I don't know what the current average job search is, but let's say 3 months. At $2500 salary, person A is going to need $1800 to bridge that 3 month gap (this assumes that he gets paid wages owed by the ex-employer).  If he already had a balance of $1800 on the CC (fairly average), he's now up to $3600. His new job only pays $2100 a month for an after tax income of about $1900, and he has to buy about $250 in new clothes for the job, all going on the CC. With the interest on the new credit card balance and a slightly longer commute, his expenses are now about $1950 a month. Ooops. Now he's making $50 less a month than he spends, with a credit card balance that's close to $4000 already.

This is where that cushion comes in. Person B had one and a half month's expenses saved and with no credit card balance, his expenses would have been about $20 less a month, $1880, and that $2820 he had saved would have covered the $580 difference between his expenses and unemployment for three months ($1740 from $2820 is $1080). The $250 for new clothes would leave him with $830 in savings. His expenses on the new job would still be about $20 less a month than the new take home pay. Whew. If he cuts expenses by about $30, in a bit over 3 years, he'll have rebuilt that cushion.

To me, the second person also has a better chance of finding a job faster and a better paid job at that. Why? Less stress. Person A is going to be frantically trying to figure out how to make ends meet, spending time on that worry instead of concentrating on the job search, and is more likely to take a poorer paying job just to have ANY income. Person B may be stressed, but he knows he has that cushion, and AFTER that, the credit card which has no balance. He's more focused on his job search and spends more time on it. If he'd had 3 months of expenses saved, there would be even less pressure. With 6 - 12 months of savings, this job loss has the potential to turn into an opportunity to start his own business or go into something new.

This post is already very long, so I'll try to cover how to build a cushion later this week.

Doing the math

I am, if you haven't already noticed, a math person. And I think a lack of comfort with basic math is a source of financial trouble for a lot of people. I'm not saying that, presented with a math problem, that they can't do it. But they don't think in those terms, and they make a fuzzy (often very wrong) estimate or judgement rather than actually figuring out the true savings. For example, be a little cautious about the "per unit" pricing in grocery stores. I have occasionally seen one that was mispriced. If a one pound package of something is $1.29 (unit pricing shows as $.13 an ounce) and the one pound package of the same item next to it is $1.89 (unit pricing shows as $.11 an ounce), the first one should not cost more per ounce. At least not in this universe...

OK, double check the package weights, then pull out your handy calculator. The packages are one pound which is 16 ounces (I'm using typical US measures). You need to change the price from per pound to per ounce. So, $1.29 divided by 16 is $.0806, or eight cents an ounce. $1.89 divided by 16 is $.1181 or twelve cents an ounce. So, the first one was obviously calculated wrong. But it turns out that someone also creatively chose to round down on the second item. It may not look like much difference, but $.11 by 16 is actually $1.76, $.13 less per package, a noticeable difference.

To calculate which things are most worth doing to save money in purely practical terms, do the math on that as well. Figure out how long it takes to do or make the item, work out how much it costs you to make, then how many you could make in an hour to work out your "hourly" wage. 

For example, I can make my recycled jeans tote in about 15 minutes, probably less, so I could make 4 in an hour. The fabric is free, and I pay about $.50 for the strapping for the handle and maybe $.05 for the thread. I could probably sell one of these for at least $2.50. Subtract the cost of the materials, $.55, from $2.50, and I have $1.95 profit per bag left. Multiply by 4, and my "hourly" is $7.80. A reasonable return, and there's the pleasure I get in making them myself and the satisfaction of getting a little more out of that pair of jeans.

However, go further: if I bought a bag like this for $2.50, I'd have to pay sales tax (8.25% in my area), adding $.21 for $2.71. AND don't forget you're buying in after-tax dollars. The SS would be about $.22, and income tax in the 10% bracket would be about $.33, bringing us up to $3.26 in pre-tax income to buy that bag. This is the real cost you should calculate for your hourly "wage" in making the bags. You'd have to make more than $13.04 per hour to make the commercial bag "cheaper."

Whether this is worth it to you is, of course, relative. If you make $40 an hour and can get all the hours you want, this isn't worth your time purely as a money-saver. If you make less than this per hour or can only get a limited number of work hours, it's definitely worth your time, assuming you need the bag or can use it or gift it. If you're unemployed with limited prospects right now, this could be a small microbusiness, bringing you in a few dollars extra. And if you're a Bill Gates type, can I suggest that your time might be better spent thinking of ways to help CREATE jobs in the US, which would incidentally create more customers for you (still the biggest market in the world?) If the concept is confusing, call me, and I can explain in simple terms...

 

I'm blessed to come from a family in which I think everyone has a natural "feel" for basic arithmetic, including ones who seem to think that they aren't that sharp (they unfortunately compare themselves to members of the family rather than the general population). And in my family, math was practical: I sometimes think we got the idea of APPLYING math to the real world in our formula. If you weren't that fortunate, keep in mind that recognizing a weakness is the first step to finding a way to compensate or overcome it. For this purpose, what you need are basic arithmetic skills and the much-neglected ingredient, COMMON SENSE. If you're multiplying $2.28 by 3, and your answer isn't more than $6 (the first number of the price multiplied by 3), then you obviously need to check your math. If the first number is $8 or larger ($2 times 4), then you may need to check your math again since $2.28 is much closer to $2 than $3. If you know you aren't great with math, check yourself with a calculator. Twice. Or three times. And always carry a calculator into the store.

Local thinking

Local thinking is how I describe finding creative strategies for your particular circumstances. I can give you recipes all day for things that are money-saving for me, but if ground turkey is $3 a pound rather than $1.29 a pound where you live, those ideas aren't going to be as helpful for you. What you can get from the ideas are a philosophy to help you adapt to your local circumstances. Ground meat is ground meat, and hamburger and ground turkey and ground pork can frequently be interchanged. In a dish with a lot of seasonings, one ground meat is pretty much the same as another.

So, you found a really fantastic sounding recipe, but it calls for ground sirloin, portabella mushrooms, some obscure goat cheese that's $15 a pound, and fresh tarragon and rosemary. You calculate the cost per serving and decide it would be cheaper to go out for steak. Well, wait. Take a critical look at the recipe. Does it really NEED ground sirloin? Will a cheaper form of ground beef, or even ground turkey, work? Portabellas are lovely, but ordinary white mushrooms might substitute. Find out what the cheapest close match to the cheese is (we've found that cheddar, mozarella, and monterey jack can be substituted for most things). And while not AS good, often dried herbs can be substituted. With substitutes, this dish might be made for less than half the original cost and be ALMOST as good. If the gourmet quality food is more important to you, then simply look at another area of your life to cut back in.

Learn what will substitute well for other ingredients, and be willing to experiment. Just because a recipe calls for Pink Lady apples doesn't mean that's the only thing you can use. However, in general, you can only make limited changes, if any, to the proportions of ingredients in a baking recipe, and any changes in the type of flour, for instance, has to be carefully considered. Wheat flours, white or whole wheat, have qualities that make it good for baking bread that many other flours don't share. Honey and sugar can be substituted for each other sometimes, but it requires adjustments to the liquids in a recipe.

Bulk purchasing

Buying in bulk can seem like an impossible challenge at first, if you're living paycheck to paycheck. But you can ease into it slowly, bit by bit, and if you resist the urge to spend the money you save on other things, you'll soon be able to take advantage of sales and great deals to save even more. Keep in mind that bulk buying is generally much better suited to staple foods rather than perishables.

Start really small, with just $3 extra. Week 1, instead of buying sodas at work from a vending machine at $1.00 a can or more, buy two 2-liter bottles of soda at the grocery store for $3, take them to work with you, and make them last the week.  If you're like most of the people I work with, you've skipped $10 worth of canned sodas and only spent $3.

You have that $7 to start Week 2. You need to buy pasta this week, and macaroni is $.89 a pound. If you normally would use a single pound for the week which would have cost $1.29, buy 3 pounds of macaroni for $2.67, using up $1.38 of the money you saved from the sodas. You still have $5.62, and the store brand of tomato sauce is  $.29 a can, instead of the $.44 a can for the name brand you normally buy. Instead of buying 3 cans of the name brand at $1.32, buy 9 cans of the store brand for $2.61, using up another $1.29, leaving you with $4.33. Buy the 2 liter bottles of soda again for $3, and you have $1.33 left over.

Now you're into Week 3. You have $8.33 ($7 + $1.33). You don't need macaraoni again, so that $1.29 is available, and you don't need tomato sauce, another $1.32 available. So, now you have $10.94 for bulk buying. You buy a pound of rice every other week for $.89 a pound. You notice this week that 5 pound bags $.59 a pound, so you get one of those for $2.95, using up $2.06 of your $10.94, leaving $8.88. You normally buy a couple of cans of broth for 2/$.98, but you decide to try the soup base for $2.99, using up another $2.01 of your bulk money, leaving you with $6.87. You decide to try making bean soup as an experiment, Spending $.89 on a pound of navy beans and $.89 on a pound of kidney beans, using another $1.78, leaving you with $5.09. You buy a package of ground turkey and freeze it for $1.39, leaving you with $3.70. Buy your soda and you have $.70 left for next week.

In Week 4, you have the $7+$.70, $1.29 for the macaroni, $.98 for the broth, and you saved $2 on lunches by taking homemade bean soup. That gives you $11.97 to work with. You look at the oatmeal rather than the cold cereal, and discover a big container is on sale for $2.29, with about 2x the servings of the cereal you normally buy for $3.29. Buy two at $4.58, and you've used $1.29, leaving you with $10.68. You glance in the meat case, and discover whole chickes are $.69 a pound.  You always passed on them before because it was a lot to spend on one thing, but this time you pick up one for $5, knowing you'll get at least 3 meals out of it, probably saving you $1 a meal, and leaving you with $5.68. You discover that your favorite brand of soda is $1 instead of $1.50, so you buy 5 of them, leaving you with $.68 for next week.

It's Week 5, and you have $7 that you didn't spend on vending machine sodas, $.68 from last week, $.89 because you don't need rice, $.98 because you don't need broth, $2 you saved on lunches by taking bean soup, $3.29 for cereal you don't need, and $3 you saved on suppers by buying a whole chicken.  You now have $17.84 for your bulk buying (see how this snowballs?) You need pasta and buy two 2-pound packages of spaghetti for $.89 a pound, $3.56, less the $1.29 you normally spent, using $2.27. You have $15.57, and you check the tomato sauce. The sale isn't as good, but you get 12 cans at $.34 each, for $4.08, less the usual $1.32, leaving you with $12.81. You wander by the frozen meat case and notice that out of season turkeys are $.59 a pound. One of the smaller frozen turkeys, around 14 pounds, is $8.50. You realize you have more than enough to buy it, and you can get several meals out of it, a pot of soup from the carcasse, and freeze enough meat for several more meals. And you STILL have $4.31 left for next week.

In Week 6, you have $7 from sodas, $4.31 from last week, $.98 from savings on broth, $3 you saved by making turkey and bean soup for lunch, $3.29 you saved on cereal, $1.29 on pasta, $1.32 on tomato sauce, and $5 you saved on suppers. That's $26.19 you have available for bulk buying this week, and you still have about 3 1/2 pounds of rice, 3 pounds of spaghetti, 9 cans of tomato sauce, a chub of frozen ground turkey, several meals worth of frozen cooked turkey, some oatmeal and beans, and plenty of soup base. And all you did was start with $3.

Some of you have a lot more room in your budget, and that's great, just apply this in ways that make sense for your circumstances (set aside a certain amount each week to take advantage of good sales). Some of you, though, are already eating the cheapest things you can find. All I can suggest is try to scrape together an extra dollar or two and use it to take advantage of a really good sale to buy extra of something you use. Though I ordinarily frown on ramen soups as lacking nutrition (and the poorer you are, the more you need to be careful of it), eating those once a day for a few days as a temporary measure might be enough to get you that dollar or two. It will still snowball, just more slowly. But it's a tiny amount of effort for the end results.

A quick word on a related subject---the pantry. The poorer you are, the more important it is to have a reasonable amount of food stored. Once you are past the first few weeks and have that bulk-buying money established, start buying a little extra every week in staples and canned goods. Use up older stuff first, but build up some extra. I think everyone should have at LEAST 2 weeks worth of food and water in the house for emergencies, and preferably at least one to two months of food. This can be built up slowly, a bag of beans here, a bag of rice there, a couple of cans of vegetables, $2 - $3 a week, and you can store up a month's worth of (admittedly boring) food within a few months. Even $.50 worth of food stored per week gives you a little cushion.

I've heard this referred to as hoarding, and I'm baffled by that attitude, at least in relation to the poor. If food prices jump up, the poor are going to be hit the hardest (think back about 3 years ago when flour and rice and other staples doubled in price in the US.) This is a kind of food savings account, whether against inflation or against illness/loss of income. I have about 2 months worth in the house and would be happier with 4 (but I lack the space to store it), though I admit by the last couple of weeks, we'd probably be living on things like rice with just a touch of canned chili on top for flavoring. About once a year, we pull out anything that's getting older that we weren't able to eat and donate it to a food bank so it gets used while it's still good. So, in our case, it's also a form of charity.

Finding a few extra cents...

I promised a few ideas just for those who are really desperate. So if you feel confident you never will be and just aren't interested in reading about truly penny-pinching ideas, skip this one.

***Make sure you check into local ordinances and state laws before you do any of this*** 

Been unemployed for a while, and the job prospects in your area still look bleak and you're financially against the wall? Then it's time to step into more drastic territory. The one thing you have in abundance is free time, so making ANY money from your time is good. Cut out everything that is not an absolute necessity (I'll go into ideas on that on other days), then start with an inventory of your resources.

What day-to-day skills do you have? Can you sew, clean, tell a story, fix a flat tire, paint trim, weed, anything? What assets do you have that you could part with? Does your area have lots of yard sales? A recycling center that will pay for metal or glass?

If you can fix a flat tire, you could make up a small (1/4 page size) flyer, and pass them out in the parking lot of a grocery store, or, if that's not allowed, a church, advertising your skill and willingness to drive out and change flat tires and help them get the damaged one repaired or replaced if needed. State rates and when you are available and give a cell phone number. Don't say "any time of night or day" unless you really mean it, though. Get help with the flyer if you don't know how, and make it as cheaply as possibly. If you repeat the flyer 4 times on a sheet of paper, you can make 25 copies and have 100 flyers to pass out for a pretty small investment. Keep the rates cheap enough that it seems worth their while, especially if the local auto assistance group tends to take an hour or two to show up. If you get even a couple of calls a month, that's still extra money in your pocket.

If your area has lots of yard sales, this could be either a source of raw materials or items for resale IF you know a lot about the items and have the knack of selling on EBay, for instance. Most yard sales have lots of clothes that no one buys. If you can pick up old pants at the end of the day for $.05-.25, you can make shopping bags that should sell for a couple of bucks. If you can quilt, even better. But don't make full sized quilts. Make quilt blocks that you turn into purses and totes and backpacks. These are faster and require less matching fabric. Your dollar-per-hour return will probably be below minimum wage, but your time isn't earning ANYTHING if you don't.

You may even be able to get bags of ruined clothes that weren't worth donating to a charity for free (and most charities get items too unusable to resell that they'll give away). Ruined clothes often have small areas of useable fabric. These can be washed and cut into quilt pieces or made into scrunchy hair bands (that's a great use for t-shirt fabric, by the way).

If you have no skills except the ability to scrub, advertise yourself to do jobs too small or dirty for the regular cleaning crews (or more cheaply). Use the same strategy as for changing tires.

The point here is: think creatively. And keep in mind that getting SOME return for your time is better than getting none. Working 40 hours for a return of $2 an hour gets you $80 you wouldn't have gotten otherwise.