Budgeting in the big city

Dear Liz: You’ve written about the 50/30/20 budget structure that people should strive to achieve. As you 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.

Answer: 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—under 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 consumer 30% of their after-tax incomes 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. 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.

Budget too tight? Cut your overhead

Dear Liz: 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 well over 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 debt elimination seem 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?

Answer: 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, there simply won’t be 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 they simply can’t live cheaply enough where they are, and opt to move elsewhere. Books and websites 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 an easy prospect in this economy, but a second job or a side business could help you get out of debt and save for a down payment.

Income dropped? Expenses have to drop, too

Dear Liz: I was laid off in November 2009. For the first year, I took the unemployment and tried to find a job without success. So, in late 2010, I started my own business, contracting mainly for employers for whom I used to work. Unfortunately, I am making about a third of what I used to make, and even after cutting expenses, there are months that I can’t pay my bills. I have taken two withdrawals from my self-directed IRA this year. Is that the smartest thing to do? Or should I even out my cash flow by writing myself loans from my home equity line of credit?

Answer: You need to accept your new reality, rather than papering it over with ill-advised loans or raids on your retirement accounts.

That means reducing your expenses dramatically to reflect your new, lower income. If your housing expenses eat up more than a third of your current pay, for example, you need to consider your alternatives. You have equity in your home, which should make a sale easier. If you want to hang on to the house, consider getting roommates or even renting out the house while you live elsewhere (if the rent will cover your home’s monthly expenses).

You may have loan payments or other debts taken on when you had more income that you can no longer afford. If that’s the case, discuss your situation with both a legitimate credit counselor (one affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org) and a bankruptcy attorney (find referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org).

Your home equity should be reserved for emergencies, not used to finance a lifestyle you can no longer afford. And your retirement funds should be left alone for retirement.

Help your pet without risking your finances

Dear Liz: Due to lack of work over the last few years, I finally began my Social Security benefits this year. I can afford only catastrophic health insurance, so I hardly ever see a doctor anymore.

So here’s the problem: A pet! I have had my cat Jackie for nearly 14 years. Jackie has a growth on her neck that has been growing since last fall. Last week, I took her into a pet clinic that offered free first visits. Their suggestion was to remove it and have it tested for cancer. The cost was $450 just to remove it, with another $150 to have it tested. Ouch! If it is cancer, I can’t afford the treatment.

The vet says Jackie seems remarkably healthy and could live another five or six years. Do I spend that extra money for a possible negative assessment of something I can’t afford to cure, or do I just let her live out her life with the growth continuing? I feel like I am not being a good parent.

Answer: A pet may feel like a family member, but your cat is not your child. Although most parents would willingly bankrupt themselves to save a child’s life, you don’t face a similar obligation to extend a pet’s life.

You do have an obligation to make sure a pet doesn’t suffer, and you may have more options for treatment than you think. Discuss your situation with the vet who assessed Jackie to see if more affordable diagnostic and treatment options are available. If you’re willing and able, your vet may consider allowing you to work off a bill by cleaning kennels or answering phones, according to Humane Society of the United States.

If not, contact your local animal shelter to see if it can recommend a veterinarian willing to discount his or her services. There are also a number of national and local organizations that provide financial assistance to pet owners in need. You can find a list at the Humane Society’s website.

If you get another pet down the road, consider buying a health insurance policy for the animal. The American Society for the Prevention of Cruelty to Animals estimates a typical policy for a cat would cost about $175 a year, although premiums vary based on deductibles and what the policy covers. Veterinary costs have spiraled to the point where these policies can provide real protection against catastrophic bills.

How to beat “frugal fatigue”

Dear Liz: I’m 28 and trying to get better with money. I’m enrolled in a debt management plan through a consumer credit counseling service and have paid $21,000 in credit card debt down to $8,000. The debt was left over from my divorce three years ago — my ex is nowhere to be found, so it’s all on me to pay it off, which should be done by early 2013. The biggest chunk of my paycheck goes to this debt and rent. Otherwise I don’t spend much. I use coupons for groceries and anything else I need. My car payment is reasonable (less than $200 a month) and my student loans are in forbearance. I spend less than $50 a week on food. I don’t have cable, only Internet and Netflix. I cut my cellphone bill to a manageable rate. I’ve switched car insurance companies several times to get lower rates. I usually bring my lunch to work and rarely buy clothes, eat out, get haircuts, travel, give gifts or do anything extra because I don’t have the cash at the end of the month. I went from paying everything late to paying everything on time. This is a great achievement for me. But all of this cutting back hasn’t helped. I still don’t have any money in savings and very little in checking. I transfer money into a savings account but then take it right out when it’s needed. And it’s always needed. I’ve been trying to find a second job or even a new job that pays more, but I feel like it’s impossible right now. Do you have any advice that could help me?

Answer: What you’re experiencing is frugal fatigue. You’ve cut and you’ve cut, but you still have a long way to go. It’s easy to look at the road ahead and feel discouraged.

But you have to give yourself credit for paying off $13,000 in debt. That’s a huge achievement. Give yourself another pat on the back for staying current with your bills.

The discipline you’re learning will help you enormously in the years to come. You’ll be able to build a substantial emergency fund once the debt is paid off simply by redirecting a portion of the money you’re now sending to creditors.

In the meantime, don’t sweat the fact that you don’t have a huge savings account. Work on setting aside just $500 or so, which should cover most small setbacks and keep you from having to use your credit cards. If you have to drain your savings for an emergency, that’s OK — the fund is serving its purpose. Just build it back up again.

Earning more money is usually the fastest way to dig yourself out of a hole. If you can’t find another job or a better job, create your own job. Perhaps your work skills lend themselves to moonlighting. If your job allows you to take on freelance clients, that’s a good way to bring in extra money. Otherwise, if you have a talent or skill you can teach, do that. If you don’t, consider providing services that others need: house cleaning, house sitting, dog walking, errand running.

You can look for some ways to give yourself more breathing room. If you’ve cut all the small expenses, then it’s time to look at the big ones: your rent and your debt payment. You may be able to free up more money for saving, and for living, if you find a roommate. Also, ask your credit counseling agency about the possibility of reducing your payments a bit. It will take longer to pay off your debt but it could make life more pleasant in the meantime.