During 2011, my first year after getting out of debt, I spent just over $20,000 for the entire year. Most importantly, I didn’t mooch off of anyone. This article breaks down the process for you, step-by-step, so you get cut your spending to $20,000 per year and get out of any financial disaster you may be facing:
Track Your Spending with Mint
The foundation for living on 20k a year is tracking your finances. There is no way for you to know if you are living on $20,000 a year if you aren’t tracking every dollar you spend. Tracking your money is easy. Just to head over to Mint.com and sign up for an account (or start using the Mint account you already have). There are all sorts tutorials out there on how to use Mint (like mine). Most of the tracking process with Mint is automated and won’t require much of your time so head over and get that all set up so you can start measuring your process.
Cut out the Smoking (or other Addictive Habit)
Smoking or other addictive habits need to go in order to live off of $20,000 a year. Back in 2011, I was a smoker. Throughout the year, I made several attempts to quit, which helped me understand what worked and what didn’t. But finally, late in the year, after deciding I was going to start running, I made up my mind. I had returned from a run and was hacking up a lot of nasty flem, I looked at my pack of cigarettes sitting there, and threw them away (half used).
You know you’re serious about kicking a habit when you throw away perfectly good cigarettes. I just wasn’t having the flem it was causing me. Sometimes, it takes starting a good habit in order to kick a bad one. In this case, picking up running gave me the motivation to quit smoking and I save thousands of dollars a year now because of it. Kick those bad habits that are costing you money.
Get Out of Debt and Stay Out
I paid off my debt after years of struggle in December of 2010. That meant no more $351/month car payment and no more $66 per month student loan payment. Not sending that $400 plus dollars out to creditors every month lowered my yearly cash outflow by close to $5,000. Now, I actually spent that money years before when I went to college and bought my car, but not incurring extra debt (which I would have actually paid for in 2011), saved me loads of money.
Debt is a financial emergency. Get out of it ASAP (if you have any) and stay out of it (if you don’t). It will save you thousands per year by not having to pay interest on it and by being able to invest that money and instead earn interest on it. FYI: I cashed out over $12,000 in dividend and long term capital gains from my investments in 2013 because my money was invested instead of borrowed.
Set Clear Savings Goals
In January or 2011, I set a big fat savings goal. I had just paid off all my debt and now needed to build my emergency fund. Looking at my financial picture in Mint, I realized that with my now higher cash surplus every month, I could possibly save up the $10,000 emergency fund I wanted to build by May 1st. It was a long shot, but very possible. So I set the goal to have $10,000 in my savings account by May 1st of that year (just a few months later). I missed the goal by a couple weeks, but none-the-less, I built that emergency fund and did it incredibly quick.
Stop Eating Out and Start Eating at Home
If you’re not careful, eating out can cost you hundreds of dollars each month. A meal here or a meal there adds up to $30-$50 for each time you decide to forgo your $5 meal at home and opt for more convenience and the atmosphere. When drinks are ordered, you’re looking at all kinds of money leaving your bank account that didn’t have to.
Before I cut my eating out in 2011, I was spending hundreds of extra dollars per month and putting on weight. Cutting the eating out can help you get your spending down to $20,000 a year and can trim your waste-line in the process. Consider eating better by buying groceries and making your own meals instead of paying other people to make meals for you and bring them to you.
Stop Taking Vacations (at least temporarily)
Look, I’m a big fan of taking vacations and plan on taking at least a couple this year, but when you’re in an emergency financial situation, like being in debt, I’d recommend making sacrificed in this area. In 2011, I cut out all vacations and it enabled me to live off of 20k a year. A single vacation for just one person can typical start around $1,000, which is 5% of $20,000 a year. Taking two vacations of $1,000 each is a whole 10% of 20k a year. Ouch. Vacations can add up quickly so if you want to cut your expenses this year and get down to the 20k a year level, consider forgoing vacations for this year only. It will be worth it in the end if it helps you make serious financial progress.
Work Hard and Focus on Your Income
Now, I don’t advise focusing on your income more than your spending. I only argue that when you work hard and focus on your work, you will be less likely to go out and spend your money. Working full time or even more than that can help you cut expenses if you’re busy working and not shopping. In 2011, I worked incredibly hard and in the process, increased my income by a huge percentage. If you want to live off of $20,000 a year, remember to work hard and focus your attention on other things than spending money.
Focus on the Bigger Picture
Focusing on the bigger picture is crucial to being able to live off of $20,000 a year. Living on $20,000 a year is not easy so you’ll need to clearly understand WHY you’re doing it if you’re going to accomplish it. Keep in mind what matters most to you. Whether it’s having more time for your family, being able to stay home with your kids, being able afford your own home or being able to start your own business, remember what it is you’re doing this all for (trying to live off of $20,000 a year). Keeping the bigger picture in mind will allow you to accomplish this and make SERIOUS progress financially.
Your #1 Tip for Living on $20,000 a Year
Whether you have or have not dropped your spending to live on $20,000 a year, please share ONE THING you’ve done to successfully cut your spending in order to accomplish your goals.