Size Matters: Keeping Your (Financial) Foundation Small

photo: woodleywonderworks

In this column, I’m going to investigate what’s wrong with my brain and what that has to do with personal finance.

But first, want to blow the rest of your day? Check out this infographic, from Visual Economics:

How the average US consumer spends their paycheck

The data comes from a twice-yearly survey by the Bureau of Labor Statistics. The bureau cautions against comparing your own situation against the averages. Oh, please.

My family’s income is very close to the national median. But we spend it differently.

* The average American family spends 34.1% of their total spending on housing (including utilities and maintenance). We live in a wealthy neighborhood–but we spend 28%.

* The average American family spends 17.6% on transportation. We spend 2.8%.

Somehow, we neglected to adopt a middle class lifestyle. I’m married, with one child. Most people I know who fit this description live in a house, with a yard, and one or more cars. We live in a small apartment with no cars.

I’m not arguing that my lifestyle is better than yours. But while drooling over the comely data, I realized that living small has a huge impact on my financial well-being. Food, shelter, clothing, and transportation are foundation expenses. When you cut deeply into them, life starts to fall apart.

This suggests a financial rule of thumb. My wife came up with it:

Keep your foundation small.

Your foundation is the portion of your monthly spending that can’t be reduced without serious pain. Your mortgage or rent is definitely part of your foundation, as is your car payment. Food is part of your foundation–although eating out probably isn’t. Your utility bills are in there–sure, you can take shorter showers, but you can’t just skip out on the water bill without serious consequences.

Lots of personal finance advice focuses on reducing luxury spending: stay on budget by cutting out the lattes, the shoes, the vacations.

But what if this is precisely backwards? Learning not to overspend on fun stuff is important, but shrinking the core expenses–especially housing and transportation–is actually a better move.

Our small foundation comes from a combination of luck and choices, and here’s what it buys us: It would take a severe financial hit to knock us off balance. (Yes, I realize that’s just asking for the universe to serve up the equivalent of an oil spill in our backyard. Not that we have a backyard.) In an emergency, we could pare down a whole lot of luxuries before having to cut into the stuff that would really hurt.

In fact, we could literally slash our income in half, and it wouldn’t be fun, but it wouldn’t be a disaster, either. We’d have to suspend a few savings goals and cancel our upcoming vacations. We wouldn’t have to move, or sell a car, or declare bankruptcy. We could survive in this mode for years if we had to.

Live it up

I thought my wife and I had invented this clever idea, until I read the book All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. (Yes, the Elizabeth Warren who chaired the Congressional Oversight Panel investigating the Troubled Asset Relief Program, a.k.a. the Big Bank bailout of 2008 and 2009.) In their book, the mother-daughter duo recommend a simple formula: spend 50% of your after-tax income on necessities, 30% on wants, and 20% on savings.

Naturally, I whipped out the calculator to run my own numbers. Necessities: 50%. Wants: 22%. Saving: 28%. (Admittedly, some of that saving is saving for wants, so maybe it should go in the other category.)

Now, I want to own up to some of my family’s lucky breaks:

* My wife’s job is a short bus ride away, and my job requires only a computer, a phone, and a place to park my butt. (Preferably not at home, since home has too many snacks.)

* Our daughter attends a good public school that’s walking distance from our house.

* We only have one child, which makes apartment living especially easy.

* We have good health insurance.

All of these things make the family finances a lot easier than they might be. But there’s another factor that I think trumps all of them: There’s something weird about my brain. (My wife’s brain, too, but don’t tell her I said that.)

Unlike nearly everyone I know in the married-with-children camp, I don’t have the slightest interest in a house, a yard, or a car. We didn’t choose our living situation based on frugality; we chose it based on convenience and preference. It just happens to be cheap.

The result of my particular brain malfunction: on an average income, I feel wealthy. I’m not a frugal person by nature. I like buying electronic stuff, and I can afford to do it, because that money isn’t going into a pair of cars and a big house.

Again, I’m not exactly counseling anyone to be more like me. I’m not sure how you would do it, anyway. I’m satisfied with less housing and transportation than the average person, but I’m not eager to downsize any further. So if apartment life sounds to you like jail, I’m not going to argue.

It does worry me that I can’t explain my unorthodox preferences. Maybe I have a biological clock that’s going to go off in a couple of years and give me an insatiable desire to do yardwork.

Until then, however, I have as much car (zilch) and as much house (750 square feet) as I want. I’m not exactly “the millionaire next door“. But sometimes it feels like it.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.