I am trying everything I know. I buy very few convenience foods at the grocery store. I have my heat set at 69. I had my grocery bill down to $300 a month. For a little while it looked like things were going good and then everything started climbing again. We are planning to pay off the credit card bills with our income tax refund but I am afraid it will not be enough.
Kim

Kim's question is a common one. A family spends more than they make. So they do a little homework and put some numbers on paper. The next step is the hardest, but most crucial one. Finding out what to do to close the gap.

Fortunately for Kim, and everyone else who has faced this problem, the question can be broken down into smaller, more easily answered questions.

The first question that she needs to ask is how big is the gap between income and expenses. If you're looking for $50 a month, you can consider taking a lunch to work. But if you're short $500, then lunches just aren't going to cut it.

Realistically you can cut about 10% of many monthly bills. If you try real hard you'll reduce 15%. But, unless you just waste money at every turn, it's very hard to save more than that without changing your lifestyle.

If your expenses exceeds your income by 10% or more, you probably need to consider major changes. You've either spending too much on house or auto payments or you're living way beyond your means.

When your housing and auto payments combined are more than 45% of your take home pay it becomes difficult to balance your budget. Usually the only solution is to refinance or trade for a less expensive home or auto.

It could be that payments for past purchases are dragging you down. Kim's payments aren't too bad, but many people could balance their budgets if it weren't for credit card minimums. Consider consolidating the debts to a lower interest rate home loan or credit card. If that's not possible, it may be time to contact a credit counseling company for help. It's also time to consider cutting up the credit cards.

Kim is fortunate that she's not facing a huge problem. If she can cut $100 to $200 from her budget, things will look a lot better. So where should she start?

For most families the groceries/food area is the best place. We spend a lot on food. We also make a lot of decisions about buying food. That makes it easy to save a little bit each day.

Next, she should price shop her home and auto insurance policies. A change in coverage or company could save hundreds a year.

After that it's time to look at her utility bills. The best way for Kim to evaluate her utility bills is to compare them to her neighbors. If your home is about the same size, but your bill is much larger, then you know that something is wrong.

After all this Kim may still find that there's not enough money at the end of the month. When that happens she'll have to consider dropping some lifestyle choices. Perhaps they really can't afford cable TV, gymnastics and cell phones.

It appears that Kim is a stay-at-home mom. That gives her the opportunity to turn her time into money. She can do that three ways. The first is by being a super shopper. She has the time to search out consignment shops and yard sale bargains.

Secondly, she'll save by avoiding purchases. Sewing, gardening and cooking from scratch all reduce expenses.

Lastly, she can increase their income with a part-time job. Watching a neighbor's kids after school or doing some housecleaning one day a week might be just the ticket.

A couple of final thoughts. Kim's right that the credit card balance creates a problem. Using their tax refund to pay it off is a good idea. But if they don't create some room for savings in their regular budget, sooner or later they'll run up a credit card balance again. The only way to avoid that is to save some money each month.

Also, a large tax refund could be a sign that they need to change their withholding rate. That would increase take-home pay.

Often it's a combination of things that put a budget into shape. Hopefully Kim will find the combination that works for her.

� Gary Foreman


Gary Foreman is a former financial planner who currently edits The Dollar Stretcher.com website and newsletters. You'll find thousands of articles to help stretch your day and your dollar. Visit today! www.stretcher.com

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