By Michael Lewis
Dallas Weekly Contibutor
DALLAS, TX — Fiscal cliff, sequestration, spending cuts, and austerity are all buzzwords we seemed to have heard this year. At the beginning of 2013 the United States had reached the debt ceiling. In other words Uncle Sam couldn’t borrow any more money to pay the bills. Apparently everyday folks aren’t the only ones trying to make a dollar out of fifteen cents. If we were to examine our monthly expenses what would we find? How many of us really need the things we spend our money on? What could we, if need be get rid of or substitute for something else? The common rule of thumb to rate wealth comes from the ‘Pareto principle’. Italian economist Vilfredo Pareto came up with the 80-20 rule in 1906.
For the purpose of budgeting, the 80-20 rule means that we should be able to pay 80% of our bills with only 20% of our paycheck. Wait a minute Pareto must have not have known gas would cost an arm and a leg, or it would take $10 dollars to buy a box of cereal and a gallon of milk! Let’s use this principle in a real time example. A person bringing home $500 per week according to the rule of thumb should only spend $100 in that week.
In 2013 that seems a little unrealistic. So instead let’s flip the rule, and say that our expenses will only make up 80% of our income, and the 20% will go towards saving. What that means is, for the same person bringing home $500 per week, he or she can use $400 to pay towards bills and put the $100 up for a rainy day. On a monthly budget our imaginary person with $2000 in income ($500×4), has to live on $1600 per month, but is creating a savings of $400 per month. This formula can be used for any income level to help set a budget, but how can we get our spending to 80%? Just like the government we have to take severe action.
Here are a few simple ways: Review our insurances. With so many service providers, switching car and home policies can save a few dollars per month; Review our utilities. Several energy companies offer plans that might help to decrease the monthly bill; Review extra services. The internet, cable, or cell phone plans we have may be more than what’s actually needed; Pay the bills we have on time. Most companies add a late charge for missing the due date. These fees can add up over time; Look for coupons. It may seem time consuming, but helps to save money on the things we buy regularly. Putting a dollar amount on what we should be spending for monthly expenses and cutting out unnecessary bills are important parts of budgeting.
Maybe we won’t ever be able to have Beyoncé come to our house and sing like she did at the inauguration, but it’s very possible for us to look at our finances and wonder that old Destiny Child song ‘can you pay my bills, can you pay my telephone bill’.
Additionally, while these statistics may be positive news for the U.S. economy, the revolving nature of credit card debt means that increased borrowing may ultimately have a negative impact on the nation’s long-term growth. This is especially true if consumers borrow based on sentiment and impulse rather than cold hard fact, or fail to dramatically reduce their personal debt liability before seeking out new lines of credit. In short, consumers must ensure that they continue to reduce their debt levels in an effective and responsible manner, without borrowing unmanageable sums of money.
It is also important that you attempt to reduce your debt without spending unnecessarily, as there are numerous management solutions that demand an initial investment without delivering value for your money.