“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

This is my third, and final, installment in a continuing series on real financial independence. Now is when I help us see when we may be inadvertently planning for failure…

Too much house
You can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your budget. Too much house is one of the most common mistakes a young family can make.

Try to keep your rent under 20% of your take-home pay after you graduate from college. Aim for all associated expenses (mortgage, insurance, taxes, etc.) to be less than 30% if you own property and some of the payments go toward the principal. And by no means let your housing costs exceed 38%, or your budget will be doomed before it even begins.

Most of us never saw our parents and grandparents in their younger days when they were struggling financially and lived in tight accommodations. It is as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers. To decide how much house is enough, calculate how much house you can buy for 30% of your standard of living.

Transportation
Transportation costs should be under 15% of your lifestyle spending and include insurance and maintenance as well as saving for your next purchase. When purchasing remember whether your pay cash or financing, you are paying interest.  See where the interest rate is cheaper.

As a result, your first car may be a clunker! Immediately start saving for your next car and the inevitable costly repairs. This strategy will limit the number and quality of cars you can afford. Remember, there are families earning more than you who take public transportation or share rides to work.

Eating out and prepared foods
Starbucks has become the poster child for budget busters. Buying a $4.50 cappuccino when you are young costs you $450 in your retirement account. And spending $4.50 a day costs you $450,000 in your retirement!

It doesn’t have to be a latte. You can generate amazing savings from any expense. But a pricey latte illustrates the huge markup on a dollar coffee. Aim for food to be under 15% of your lifestyle spending. You would like your food to be inexpensive, healthy and convenient, but it can’t be all three. You can usually only pick two.

Healthy food tends to be more expensive per calorie. So do convenience foods. One person eating out can often fund the entire family eating at home. And even when you purchase food in the grocery store, prepared foods can cost more than twice what you would pay for the individual ingredients.

By learning to cook with common staples such as rice, beans, flour, oats, potatoes, and chicken, you can drastically reduce the percentage of your budget spent on food. Save even more by brewing your own gourmet coffee at home.

Other regular expenses
Review monthly, quarterly or annual recurring charges. Research the cheapest basic service for your phone, cable, Internet, and insurance. Often, these really are “commodities” (i.e. those things which it hardly matters who provides them). Compare that to what you are paying now, and ask yourself if those seductive extra features are really worth the cost.

A gym membership used regularly might be a wise choice, but if you haven’t shown up there for weeks, it isn’t. For each expense ask yourself, “Is this really a necessity?” Any way you can reduce your regular bills saves money every year.

In summary, every category of your total budget must stay within a limited percentage. Careful planning and a courageous look at your lifestyle can help you identify those budget busters. Adjusting a few spending excesses could solve all of your spending problems.

And, as always, my team and I are here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.