|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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I was a boy one local department store had a jingle that featured
the repeated chorus of "low overhead, low overhead". They
claimed to offer lower prices because they kept their 'overhead'
down. If they spent less on rent and other fixed expenses they could
make a reasonable profit at a lower price.
I was too young to remember which
store ran the ads. So I don't know how low their prices were or
whether the ads filled the store with expectant shoppers. But I can
tell you that the concept is correct.
And the same idea applies to our
family finances. The lower your 'overhead' is the more likely that
you'll avoid financial troubles. Let's see how this works.
First, what is 'overhead'? In the
retail store it would be the cost of rent, lights, insurance and
payroll. Everything it takes to open the store to the public. Your
family overhead is made up of all the money that you've committed to
spending before the month begins.
We'll visit the Smith family for an
illustration. How your family compares to theirs isn't important.
Just grasp the concept involved. In fact, you might want to jot down
your own expenses to see what your 'overhead' figure is.
The Smiths have a 30-year, 6%
mortgage for $150,000. That requires a payment of $899 per month to
cover principal and interest. Like all homeowners they'll need to
pay property taxes and insurance. The combined expense adds another
$2,400 each year. Or $200 per month.
Naturally, the Smiths will need
electric, water, sewer and perhaps gas or oil for heating. Some
months are worse for heating and air conditioning. But the average
is $300 each month.
If we total that up, the Smiths have
committed to spending $1,399 each month to keep a roof over their
heads. Remember that's not including any maintenance, repairs or
upgrades. We're just trying to identify how much they've committed
to before the month begins.
Next, transportation. Like so many of
us the Smiths own two cars. Fortunately, they only have one car
payment. Their Dodge Caravan will cost them $453 for 48 months.
Insurance and registration for both vehicles totals $1,600 a year or
another $133 per month. So the cost of owning the two cars is $586
per month. Again, we haven't included the cost of gasoline or
The Smiths also have some credit card
debt. They're carrying $8,000 at 14% interest. That costs them $93
each month in interest expense.
Despite more than one attempt to
quit, Mr. Smith still smokes cigarettes. Not a heavy smoker, but he
still goes through a carton every two weeks. Add another $48 a month
to the 'overhead' column.
Mrs. Smith does her part, too. Each
Friday for years she's been going out for lunch with some long-time
friends. Usually they pick a moderately priced restaurant, but it
still averages $9 per week by the time her portion of the tip is
included. So that adds another $36 to our 'overhead'.
So how much are the Smiths committed
to spending before the month even begins? Their total overhead is
Next let's see how that affects their
finances. First, we'll look at how much income it takes to cover the
The Smiths are in the 27% tax
bracket. They also pay 7.65% in Social Security taxes. Fortunately,
where they live there's no state or local income tax. To cover the
$2,162 in monthly overhead they need to earn $3,308 each month. Or a
$39,700 each year.
Look at it another way. The Smiths
combined income last year was $76,500. So of every dollar they make
52 cents goes to cover expenses that they have very little control
So what can we learn from the Smiths?
Just like the retail store, we need to pay the 'overhead' first.
Before we think about rewarding ourselves with new clothes or
vacations. The more money needed for overhead, the harder it will be
to feed our family, save for retirement, spend money on
entertainment or anything else.
The question to ask before making any
ongoing commitment is do I want to add this monthly expense to my
overhead. Is it really more important than all the other things that
I'd like to spend money on.
Not only was "low overhead"
a memorable jingle, it's also a good way to look at your family