The 4 Biggest Ways to Stretch Your Income

The other day I was talking to somebody who shall remain nameless that was lamenting the fact that life “was just too darn expensive!”

I found that fascinating considering Eddie (oops!) drives a brand new BMW and lives with his family of four in one of the tawnier parts of Southern California, yet he apparently doesn’t have enough discretionary spending available to save for an annual family vacation.

The truth is life is only as expensive as we make it.   In fact, good financial choices are often nothing more than an exercise in practicality.

Eddie is a classic example of what I like to call a financial jellyfish.  He’s not alone either; more than 70 percent of American workers still live paycheck to paycheck according to a recent American Payroll Association poll.

Many people like Eddie might be surprised to find out that they could probably uncover some significant savings that would really stretch their income if they only implemented any or all of the following four suggestions:

1. Buy a used car

As far as I am concerned, a good portion of a person’s success or failure in managing their personal finances can usually be traced directly to their decisions regarding automobiles.

When I was a kid my dad brought home a very modest salary.  I assume that’s why he never bought a new car when I was growing up.  He did his due diligence and always bought easily affordable, well-maintained, used cars that he kept for years at less than half the cost of a new car.

Now how many people do you know like Eddie that drive premium luxury automobiles today but struggle to pay the bills, or constantly complain about being short of cash?

Why is that?

The fact is, if you take all emotion out of the equation and look at automobiles as simply a way to get from point A to point B, then the value differential between a brand new car and a well-maintained used car is grossly exaggerated.

Now depending on the source, the typical car payment is in the neighborhood of $460.   I’ll wager it’s even higher for a luxury car.  But even so,  a typical car payment can be a significant impact for many families and individuals.

How big of an impact?

As an example, this handy paycheck calculator shows that a family of four living in the state of California with an annual household income of $50,000 would receive net pay of $3543 per month after withholding for state and Federal taxes.

If that family had two “typical” car payments they would be dedicating $920 per month, or almost one-third of their entire net pay, just to automobiles.

That’s stupid.

If we assume their mortgage payment is $1600 that leaves barely one thousand dollars left over to cover the groceries, utilities, cable/satellite, gasoline, clothing, health care, entertainment, home and car maintenance, retirement funds, emergency and college savings, property taxes, and an annual summer vacation fund.

I’m not saying you should never buy new cars.  Both my 1997 Civic and my 2001 Odyssey were bought new. But I still have those cars and they were both paid off years ago.  As a result, I continue to extract the maximum value of my original purchases by keeping those cars as long as possible.

That’s an extra $1000 in my pocket every month to do with as I please!  Now that’s luxury!

Think about that next time you jump into your shiny new Mercedes to make a run to the grocery store – to buy store label pork and beans for dinner.

2. Eat at home

Speaking of pork and beans for dinner…

As I previously noted in an earlier post on how you can save big money via long-term dinner menu planning, last year our family went out for dinner at a restaurant 29 times (roughly every other week) at a total cost of $1050.32 — that’s a whopping $9.05 per person per meal! As a point of comparison, the Penzo household spent an average of only $1.80 per person for each home-cooked meal.

Breaking down the numbers, what should immediately stand out is that on a per meal basis, dining out is horrendously expensive. In fact, based on my data, on average the cost of dining out is five times more expensive than eating at home!

I’m not suggesting that you entirely eliminate going out to eat, but you can free up a lot of income by eating breakfast at home, brown bagging your lunches whenever possible, and reducing the number of restaurant dinners to only one or two per month.

In essence, last year we saved almost $3200 by simply choosing to eat dinner at a restaurant every other week instead of twice per week. That’s enough for a modest family vacation.

3. Refinance your home loan

I’ve refinanced my home loan four times since 1997, dropping my monthly mortgage payment each time.  The last time I refinanced I was interested in ensuring I had the lowest payments possible, so I not only refinanced to a lower interest rate, but I also extended the term of the loan from 20 to 30 years.

What are the results of all that refinance activity?

Well, my initial mortgage payment in 1997 was roughly $1450.  Today it is a hair over $600.  Over time, that has become a savings of almost $850 per month!

Refinancing your home loan to a lower monthly payment could give you more room in your budget to pay off other debt or free-up additional discretionary income.   The key to success in implementing this plan is to not take any cash out!

If you are so inclined, using the resulting freed-up income is a terrific and painless way to pay down your mortgage even faster. In our case, we’ve always applied the freed-up income resulting from the refinancing in this manner. As a result, even though we have basically continued to pay to the bank the same mortgage payment we originally had when we first moved into the house, our home loan is currently on track to be paid off by the time my 9-year-old daughter graduates from high school – almost 10 years ahead of the original mortgage pay-off date.

4.  Downsize to a smaller house

Let’s face it, a lot of people out there end up buying more house than they realistically need or can afford, putting undue strain on the pocketbook.  For those times when refinancing isn’t a viable option simply because interest rates have gone up, you can always consider downsizing to a smaller house.

“Okay, Len.  You really should have stopped at number 3, don’t ya think?”

True, it may seem a bit drastic.  But if you have already cut to the bone everywhere else and you still find it difficult to make ends meet, then drastic times call for drastic measures.

Besides, people downsize all the time, which reminds me of a recent episode of House Hunters I was watching one quiet evening with the Honeybee.

In it, this hippie middle-aged couple said they were looking to trade their spacious old house for a “green” home that was easy on the environment.  Okay.  I mean, I certainly don’t consider myself to be one of those Save the Earth types, but fair enough.   To each his own, as they say.

So I say to the Honeybee, “I like these two.  They’re practical!”

“In what way?” she politely replied after a brief moment of silence, knowing that I was going to eventually carry on whether she asked the question or not.

“Well, now that their kids are off to college, they’re going to sell their big old house so they can downsize into something more appropriate for the two of them.  It’s a classic win-win situation.  They exchange their old over-sized home for a brand new smaller house and they get to pocket the difference too!  I’m not into the ‘green’ stuff, but hey, they’re smart.”

Not three seconds later, I found myself choking on the Ho-Ho I had just swallowed after Suzanne Wang said with a straight face that these two empty-nest environmentalists were in the market for a McMansion (with solar panels for hot water and electricity, of course) that was in the neighborhood of 3500 square feet!

“So much for being green,” the Honeybee snickered, not sure if she was laughing at me or the hippies.

“Or practical,” I answered, before regaining my composure.  “By the way, do we have any more Ho-Hos?” 

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