WHILE IT PROBABLY ISN’T NECESSARY to track every dollar you spend, there is value in knowing one key number: How much of your monthly spending goes toward fixed costs.
We’re talking here about the total monthly amount devoted to items such as mortgage or rent, property taxes, car payments, insurance premiums, student-loan payments, utilities, internet access, phone and groceries. Given enough time, you could probably trim these fixed costs and, indeed, that might be necessary if you simply can’t save enough for your various goals. Still, fixed costs are tough to reduce in the short term. By contrast, discretionary expenses—like vacations, entertainment and eating out—can be quickly eliminated if the need arises.
That need might arise if you find yourself out of work or you suddenly need to pay for, say, a major home or car repair. Until you find work or pay the repair bills, you might cut out discretionary expenses and instead limit your monthly spending to fixed costs. The amount of your fixed monthly costs might also help determine the size of your emergency fund, a topic we tackle in the chapter devoted to your family’s safety net.
In addition, knowing your monthly fixed costs is useful as you develop your retirement-income strategy. As discussed in the retirement chapter, you might endeavor to have enough regular monthly income from Social Security, any employer pension, income annuities, dividends and interest to cover your fixed costs. That way, you can be reasonably confident you can pay the bills if there’s a major slump in stock and bond prices.
Next: Low Fixed Costs
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