Money Management

If most of your money already goes to covering essentials, it’s hard to make cuts. 

Inflation has made life difficult for a lot of families this year, pushing up the costs of everything from putting food on the table to keeping a roof over your head. However, rising prices have had an outsized impact on low-income households. One reason is that households with less cash coming in don’t have as much breathing space when it comes to cutting costs. Here are some other reasons why.

1. Essentials make up a bigger share of spending for low-income households

Latest data from the Bureau of Labor Statistics showed that overall, living costs in October were 7.7% higher than the year before. Food at home has shot up 12.4% in a year, while energy services increased by 15.6%. That’s rough for many families. But according to research by EconoFact, low-income families spent almost three-quarters of their money on essentials like food, transportation, rent, utility costs, and cellphone services. There isn’t a lot of wiggle room.

When all those costs rise dramatically without a corresponding jump in wages, it’s incredibly difficult to find money to cover the bills. Sure, a family might be able to cut their cellphone costs a bit. But they still need to buy food and pay rent. Households that have larger amounts of non-essential spending could hold off on luxuries such as taking a vacation or buying a car. In contrast, families who already spend the majority of their income on essentials may have to decide between paying a utility bill or putting food on the table.

2. Low-income households are less likely to have savings

The stimulus checks paid out during the initial phases of the COVID-19 pandemic provided a much-needed boost to the bank balances of many low-income households. Decreased spending and stimulus payments meant the amount of money Americans held in savings accounts shot up across the board.

That extra cash has cushioned some households against some of the impact of inflation.

Unfortunately, that money only goes so far. Worse? It’s starting to run out for households that bring in less money. Indeed, not only do lower-income households now have less savings, some are also taking on debt to cover essential living costs.

According to data from the Federal Reserve, excess savings for the bottom income quartile decreased by 25% between the first and second quarters of this year. That’s the biggest drop of any income group and illustrates the degree to which these households are dipping into their savings. Plus, research by Liberty Street Economics looked at credit card balances in different ZIP codes and also showed that lower-income credit card holders now owe more than they did before the pandemic.

3. It’s harder reduce costs if you’re already buying the lowest priced goods

There’s a lot of advice out there on how to cut costs. For example, you might switch to store brand products or find ways to reduce food waste. But if you were already doing those things, it’s much harder to beat inflation. Plus, it’s also more difficult to buy in bulk if you don’t have extra money to pay for things upfront.

Another issue is the huge spikes in transport costs. This can make it harder for some families to travel to lower-cost stores and score better discounts. All in all, households that bring in less money have less flexibility when it comes to rejigging their budget and absorbing higher living costs.

Will inflation continue in 2023?

The good news is that inflation seems to be slowing, which means that prices might stop rising as quickly next year. However, prices are still high. And just because we can see the light at the end of the tunnel, it doesn’t mean we’re there yet. In the meantime, it’s the people at the lower end of the wage spectrum who continue to be hardest hit.

The looming specter of a recession is another concern. One of the best ways to protect your household against economic downturn is to have an emergency fund containing three to six months’ worth of living expenses. It makes it easier to handle job loss or other financial knocks. The Federal Reserve data suggests that lower-income households are already dipping into their savings, which could make it difficult to handle the impact of a recession.

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With these items checked off your list, you’ll be ready to pounce on that perfect home. 

If you’re a renter, you may be hoping to change that sooner rather than later, and I absolutely sympathize — I’m aiming for homeownership myself in the next few years. If you were intending to buy in 2022, you may have found yourself shut out due to the combination of high prices, rising interest rates (which more than doubled between the beginning of the year and the end), and a low supply of homes that caused bidding wars aplenty.

If you’re hoping for better luck getting a mortgage in 2023, there are a few ways to know for sure that you’re as ready as possible. It stands to reason buying a home involves jumping through a lot of financial hoops; after all, it’s the biggest purchase many of us will make in our lives. If you meet the following conditions, you just might be a strong home buyer.

1. You have a robust down payment saved

For a lot of people, myself included, the sheer amount of cash involved in buying a home is the biggest stumbling block. While you can get a conventional home loan with as little as a 3% down payment (and good credit), I don’t necessarily recommend it, for a number of reasons. Going this route will see you signing on to pay for private mortgage insurance (or PMI) until you reach 20% equity in the home. PMI doesn’t protect you; it protects your lender in the event that you stop making mortgage payments.

You can also get an FHA mortgage loan with 3.5% down, but you’ll pay a mortgage insurance premium (or MIP; confused yet?) for the life of the loan unless you refinance to a conventional mortgage. If you put 10% down on an FHA loan, you’re stuck with that MIP for 11 years. In short, putting down a larger down payment (ideally 20%) will cost you more money and time in saving it up before you buy, but it’ll pay off when your mortgage payments are lower. However, I absolutely understand not wanting to wait to amass that 20% if you live in a very costly area or just plain don’t feel like watching your rent rise year after year as you save up. Just bear in mind that a down payment under 20% may not save you much money in the long run once you figure in those mortgage insurance costs.

2. Your credit is solid

While you need not have an excellent or even a very good credit score to buy a home, it will certainly help you get approval from a mortgage lender, along with a decent interest rate. If your credit isn’t so stellar, you still have a few options, most notably in the form of an FHA mortgage. You can have a credit score as low as 580 and still be eligible to put down 3.5% (if your credit score is between 500 and 580, however, you’ll need to make a 10% down payment). But having a higher credit score gives you more mortgage options, so it pays to work on boosting it before beginning your home search in earnest.

3. Your debt-to-income ratio is under 36%

You’ll be required to provide a lot of financial information when you apply for a mortgage, and your debt-to-income (DTI) ratio is a calculation a lender will be focusing on to establish your ability to afford a home. It pays to do this calculation yourself and see how strong a buyer you are based on it.

Ideally, you should have a DTI of 36% or less. Add up all your monthly debt obligations and divide that number by your monthly income and you’ll end up with a percentage. For example, let’s say you earn $5,000 per month and make the following debt payments:

$550 car loan$100 minimum payment on your credit card$150 personal loan payment

Your DTI is 16% in this scenario, and you can likely afford a reasonable mortgage payment, at least in the eyes of the lender (who doesn’t consider how much money you spend every month on travel or your hobbies).

4. You recognize that owning a home can be expensive

If you want to be a strong home buyer, it’s important to take a long, hard look at every aspect of your finances, and really take a deeper dive than even a lender will in the course of considering your application. Owning a home is more expensive than you may assume because there’s more to pay than just a mortgage. While you may pay a lot in rent, ideally, your landlord is covering the costs of repairs, maintenance, property taxes, and maybe even some of your utilities. In short, a rent payment doesn’t equal a mortgage payment.

Once you buy a home, those costs are all yours. And if something breaks in your home, and it’s not due to a peril covered by homeowners insurance, you’re on the hook for paying to have it fixed. If you’re not ready for these costs (and don’t have an emergency fund saved up), you could find yourself going into debt to pay them. That’s definitely something to consider if you dream of homeownership.

We’re all hoping for better market conditions for home buyers in 2023 and beyond, but even if the market begins to heavily favor buyers, it pays to consider your status as a potential home buyer. If you meet all the conditions above, you can call yourself a strong home buyer candidate — good luck out there.

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Don’t set resolutions for yourself without checking out her advice. 

If you’re looking ahead to 2023 and planning your New Year’s resolutions already, you may want to think twice — at least according to finance expert Suze Orman.

Orman recommends against resolutions and says she isn’t a fan — mostly because many people fail at the New Year’s goals they set for themselves. Her distaste for resolutions doesn’t mean she thinks you shouldn’t take steps to improve your financial and personal life, though. She just has a different suggestion for how to approach that task.

You may be hoping to finally pay off that credit card debt. Or perhaps you want to bulk up your savings account balance or accomplish other life-improving goals during the upcoming year. Whatever your goal is, you may want to take a look at how Orman suggests you accomplish it.

Orman says you should do this instead of making New Year’s resolutions

Orman made clear in a blog post that New Year’s resolutions often cause nothing but problems.

“I think it puts too much focus on making goals at a specific time of year,” she said. “Most resolutions that start in January tend to be broken or stalled before March. And then you spend the rest of the year beating yourself up for not achieving your resolutions.”

Rather than falling victim to this common trend, she urges that you look “at every day as an opportunity to be kind to yourself,” and remember that “every day is an opportunity to be the person you want and are meant to be.”

While this may not seem like actionable advice that would help you accomplish specific objectives, Orman explains how to implement this philosophy in your life. Specifically, she suggests:

Searching for ways to make positive changes, even if things haven’t gone as planned.Remaining firm in your beliefs.Carefully considering your actions to make sure you’re always focused on whether they’re kind, necessary, and true.Putting “people first. Then money. Then things.”

If you keep these basic truths in mind throughout the year, they can guide you in making better money decisions (and life decisions) long after you might have given up on your New Year’s resolutions.

Should you listen to Orman’s advice?

Orman is absolutely right that many New Year’s resolutions aren’t successful — especially if you aren’t passionate about achieving them or don’t have a concrete plan.

This doesn’t mean you shouldn’t set goals for yourself to accomplish in 2023, though. In fact, if you pick one or two things you really want to achieve and make a detailed plan to follow through on making them happen, you stand a good chance of breaking the curse of broken resolutions.

What you don’t necessarily want to do, though, is tie these goals to the new year and put so much pressure on yourself that you give up as soon as you don’t stick exactly to the plan. “There are always challenges, disappointments, and setbacks,” Orman states.

If you follow Orman’s advice and look for ways to make smart choices throughout the year to better achieve your objectives, and you treat each new day as a chance to succeed, you’re likely to end up far better off than if you make the traditional New Year’s resolutions that fade away once the ball has dropped and the champagne has been finished.

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Increasing my savings rate is important to me in the upcoming year. 

In 2023, I’m hoping to save more money for some big upcoming vacations that my family plans to take while my kids are still young enough to travel without missing a lot of school. In fact, I want to save at least $1,800 more next year than I did in 2022 in order to be able to accomplish the goals I’ve set for myself.

Saving an extra $1,800 is a big feat. But, I’ve identified the path I plan to take to accomplish this goal. And, it’s something almost anyone could consider doing if they also want to save more money in the upcoming year.

Here’s how I plan to save $1,800 more next year

In order to boost the amount I’m saving by $1,800 in 2023, I’m going to do one simple thing. I’m going to work more. I plan to make an extra $150 per month compared with the amount I made in 2022.

I’m lucky enough to be a freelancer who gets paid directly based on the amount of work I turn in, so it shouldn’t be difficult for me to make this happen. I just need to set aside some extra time in my day to be able to do the extra work necessary to add $150 per month to my income.

Of course, not everyone can just do a little extra work at the job they currently have. But, almost everyone can come up with a way to earn some extra money over the course of the month. In fact, there are dozens of side gigs out there you could try out. If you earn even just $50 extra per week doing these jobs — which shouldn’t take a ton of time — you could actually increase your savings by more than I’m hoping to and end the year with an extra $2,600.

Why I’m opting to earn more instead of cutting my budget

I’ve decided I want to focus on increasing my earnings to save $1,800 more in 2023 than I did in 2022 — rather than cutting my spending. There’s a few reasons for that.

For one thing, I’ve already been pretty purposeful in my spending. I don’t tend to buy a lot of things that don’t add value to my life since I’ve tracked my spending in the past and reduced a lot of the unnecessary purchases where I was going overboard.

More importantly, though, I don’t want to take any of the fun spending out of my budget. I don’t want to constantly sacrifice in order to have a better future — I want to enjoy life today and also save for the things I want and need later on. And it’s a lot easier to do that if I try to increase my earnings rather than constantly looking for spending cuts to make.

The reality is, you can only reduce your spending so far before you cut into things you really enjoy and that make life worth living. But, you can always increase your earnings by developing new skills or spending a little more time on the job. If you’re serious about increasing savings, focusing on making more money could be the best way to accomplish that goal.

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Here’s how to shop online for less. 

Some people use Amazon for the low prices it offers. Others like Amazon because it’s a great alternative to having to leave the house and set foot in a crowded store. No matter your motivation for shopping on Amazon, with the right strategy, you can spend even less on your shopping in 2023. Here’s how.

1. Get a Prime membership

The cost of Amazon Prime went up this year to $139 a year. In spite of that, joining Prime could actually result in big savings.

First of all, there’s free shipping without an order minimum. That’s a huge money saver. How often have you added extra items you didn’t need to your cart to make the $25 minimum for free shipping? As a Prime member, you won’t have to do that. You can have a $6 item delivered to your door at no cost.

Plus, as a Prime member, you can take advantage of programs like Try Before You Buy. This program lets you try on clothing and footwear for a week before being charged for it. If the items fit well and you decide to keep them, you simply check out as normal. Otherwise, you can send them back for free and your credit card won’t be charged.

2. Have items you use regularly ship out automatically

Whether you have a pet whose food supply you frequently need to restock or young kids who lead you to go through things like paper towels at a rapid clip, Amazon makes it easy and less expensive to load up on the items you need. If you sign up for its Subscribe & Save program, you can arrange to have different items delivered to your door on a schedule you set up, whether it’s monthly, every other month, or every three months.

The best part? You can save up to 15% when you receive five or more products in the same auto-delivery within a given month. So if you time your deliveries accordingly, you’ll spend less on the essentials you use all the time.

Plus, you don’t need an Amazon Prime membership to use Subscribe & Save. So if you decide that the $139 annual fee isn’t worth paying, it won’t stop you from taking advantage of automatic deliveries and the savings they can come with.

3. Shop the outlet

You’ll find competitive prices all over Amazon’s site. But if you specifically shop Amazon Outlet, you might save even more.

Amazon Outlet is loaded with discounts, largely as a result of overstocked items. Think of it like shopping at an outlet mall, only without having to put on pants, leave the house, and make small talk with a well-meaning cashier who wants to know if you found everything okay.

Whether you’ve been using Amazon for years or only more recently started shopping the site, these are only a few of many ways you can save money on the things you need and want. It pays to look out for the different deals Amazon releases throughout the year, because you never know when a specific item on your list is going to have its price dramatically lowered.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Maurie Backman has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.

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Don’t apply for a loan until you’ve considered whether to follow this advice. 

If you are getting a mortgage, you need to be smart about it. It’s tempting to try to do whatever you need to in order to buy your dream home — especially if a bank says you’re allowed to borrow the money you require for the property. But you don’t want to jump into taking on a huge amount of debt without thinking through all of the implications.

That’s why you should consider some important advice from Dave Ramsey about one situation when you never want to take out a home loan. While not everyone should necessarily follow this advice to the letter, it’s worth considering his points before you agree to borrow.

Here’s when Ramsey says you shouldn’t borrow

According to Ramsey, you should always say no to a home loan if the monthly costs of your housing expenses would eat up too much of your income.

“You never want a mortgage with a monthly payment that’s more than 25% of your monthly take-home pay,” Ramsey warned. “That 25% limit includes principal, interest, property taxes, home insurance, private mortgage insurance (PMI) and homeowners association (HOA) fees.”

Ramsey says not to accept a loan that comes with higher payments than this amount because you’d be “house poor,” if you did. That would mean so much of your money had to go to your mortgage payment each month that you’d struggle to do anything else that’s important to you.

Should you listen to Ramsey?

Ramsey believes you should stick with a 15-year mortgage that allows your housing costs to come in below this 25% limit. That’s bad advice. A 15-year loan has much higher monthly payments and there’s a huge opportunity cost to committing so much of your monthly income to housing payments when you could get a 30-year loan that would be much more affordable and leave you extra cash to invest.

But Ramsey is right that you can’t commit a huge portion of your monthly income to home loan payments without making major sacrifices and significantly increasing your stress. While some other financial experts suggest you could go up to 30% of your income (or even a little higher if you have no other debt), the basic premise is the same — being house poor is a bad situation.

Now, if you live in a high cost of living area, are careful with money, and don’t owe for other things, and you really want to become a homeowner, then you may be willing to sacrifice to spend more of your monthly income on your house. And that’s a decision that can sometimes make sense, especially if property values rise quickly where you live so homeownership will help you grow your net worth.

But, just be aware of the serious dangers of overspending on your house and don’t go into a transaction where you borrow more than around 25% to 30% (at most) without actively considering the downsides — and trying out that higher monthly payment first to get a feel for what it’s like to live on what’s left over.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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