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Balancing Your Budget in the Big City

Q: You’ve written about the 50/30/20 budget structure that people should strive to achieve. As you’ve said, it’s a difficult feat. But here’s my question: How does one even come close when you live in a major metropolitan area? In my particular case, home values in my area have remained intact in many places, and demand for apartments is so high that vacancy rates are the lowest in the nation. To get into a relatively safe neighborhood with access to public transit, rent is over $1,000 with a roommate or two. Finding that 50/30/20 balance seems impossible for people who live here, and we can’t all just relocate.

A: If you live in a high-cost area but don’t have a high income, you’ll need to get creative if you want to keep your “must have” expenses—shelter, food, transportation, child care, minimum loan payments, and insurance—to less than 50% of your after-tax income.

Many people in high-cost areas devote 40% or more of their incomes to shelter costs, which makes it all but impossible to have enough money left over for their “wants” (clothes, vacations, gifts, and other non-necessities that should consume 30% of their after-tax income savings, according to the 50/30/20 plan) or savings and debt repayment (which should consume 20% of your after-tax income under the plan). The result is a perpetually unbalanced budget, which often leads to more debt and lots of anxiety.

But people have come up with various solutions to better balance their budgets. Blogger Donna Freedman was an apartment manager for several years, which helped lower her shelter costs. Fred Ecks, who retired in his 40s, lived on a boat to reduce his rent in notoriously high-cost San Francisco. Janine and Brad Bolon chose to raise their four kids in a 1,500-square-foot townhome in Southern California instead of springing for the McMansions their peers were buying. Other people have exchanged their services for free or reduced rent by babysitting or serving as a companion to an elderly person.

If you can’t find a solution that lowers your housing costs, you have two options: continue to live with a lopsided budget, and accept that you may never be able to achieve a balanced financial life, or move to a place where you can make the math work.

Q: The 50/30/20 budgeting plan you advocate just doesn’t work on a low income. I currently rent because I can’t afford the purchase of a house, and the lowest I can go and still be in a safe neighborhood is $600. That’s much more than 40% of my salary, and you say all your “must have” expenses, including shelter, food, and transportation, should be 50% or less of after-tax income. With rising prices, saving and eliminating debt seems like an unreachable reality. What concrete advice do you have for someone who doesn’t have a credit card and is trying to get out of $7,000 of debt, to get to stability to purchase a home?

A: Saving and debt elimination are tough on a low income. But that doesn’t mean basic math doesn’t apply in your situation. If you spend too much on your “must have” expenses, you simply won’t have enough left over to live your life, pay off your debt, and save for your future.

People on lower incomes manage to stay out of debt and save money. To do so, though, they have to limit what they spend on their overhead. They find roommates or rent a room in someone else’s house, or move in with a family or an elderly person and offer to help out in exchange for part or all of their rent. Some decide that they simply can’t live cheaply enough where they are and opt to move elsewhere. Books and Web sites devoted to the voluntary simplicity movement can give you other concrete ideas about how to live on a shoestring.

If you can’t bear to trim your expenses, your only other option is to make more money. That’s not always an easy prospect, but a second job or a side business could help you get out of debt and save for a down payment.

Q: I’m a mother of two children, and I work part-time. On top of that, I go to school full-time. Even though I receive financial aid, I have trouble saving money on a tight budget. How can I do it?

A: Saving money in your situation is hard, but it’s not impossible. The most important piece of advice is to make it a priority. In other words, don’t wait until you’ve paid your bills and otherwise spent your paycheck to figure how much is left over that you can save. Instead, pay yourself first by setting up an automatic transfer that moves some amount of money, however small, from your checking account to your savings account. The transfer should occur the day your paycheck is deposited, if possible. Even small contributions build up over time, and you’re unlikely to miss the money if you make the process automatic.

If you’ve found yourself raiding your savings for nonemergencies in the past, decide now under what circumstances you’ll tap your funds. A car repair may be a good reason. Dinner out, even if you’re bushed from all that working, mothering, and studying, probably is not. If you really can’t keep your hands off your savings, you may need to move the money somewhere that’s harder to access. You could set up an account at an online bank or at a bank or credit union that’s different from the one that holds your checking account.

Another issue that prevents many people from saving is that they spend too much on their so-called fixed, or basic, expenses. If too much of your income goes to rent, food, utilities, and transportation, for example, you may have continual trouble making ends meet. Trimming those expenses can have a profound effect on your ability to save.

Following frugality-oriented Web sites can give you ideas for reducing your expenses, as well as offer encouragement that your sacrifices will be worthwhile. As one blogger put it, saving money isn’t about deprivation; it’s about gaining control. When you make the decision to save and follow through with action, you’re putting yourself back in control of your spending and your own life.

It won’t be easy, but remember that you won’t always have to work this hard. Your education should result in bigger paychecks that will enable you to save more easily—as long as you continue to pay yourself first.

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