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Making Ends Meet
Like a lot of hardworking couples, Ilah and Dennis Hardesty of Long Beach, California, live paycheck to paycheck. Their $1,200 monthly rent eats up about half of Dennis's take-home pay as a manager for a racing car engine manufacturer. Private school tuition for their three teens takes another $400 bite. Income from Ilah's two part-time jobs -- as a fitness trainer and school secretary -- disappears at the gas station and the grocery store.
The bottom line? Even with no car payments and just $300 in credit card debt, the family barely gets by. "We don't have a penny in savings," says Ilah. "No, I actually do have one cent in my account."With inflation outpacing wage growth in recent years, it's not hard to find families like the Hardestys running out of money before they run out of month. According to the nonpartisan Economic Policy Institute, which studies lower- and middle-class economic trends, the median hourly wage of an American worker after inflation is less today than in 2003. The result is less buying power after the bills are paid.
These days, inflation is hovering around three percent, so anyone who remembers the double-digit price spikes of the 1970s might wonder what all the fuss is about. But even moderate inflation takes its toll, says personal finance expert Jonathan Pond, author of You Can Do It! The Boomer's Guide to a Great Retirement. In fact, annual inflation of just three percent doubles the cost of living every 23 or 24 years. Meanwhile, some essential expenses -- energy, health care, higher education -- are far outpacing the inflation index. No wonder families are feeling pinched.
Pinched doesn't have to mean powerless, though. Here, then, are ten ways to save money on the big bills.
1. Mortgage Makeover
For most families, the mortgage is the monster in the room. If you have an adjustable rate mortgage (ARM), the surest way to take control of that monster is to refinance with an old-fashioned fixed-rate note. The reason is that when interest rates rise, that low introductory ARM of yours will be ready for takeoff.
As housing prices soared over the last five years, ARMs became popular because the cheap initial rates lowered monthly payments and made it possible to afford a better home. But after a few years, the rates balloon to more realistic levels -- around seven percent. On a $200,000 30-year mortgage, a two percent increase adds $238 a month to your budget. It's like taking on a car payment, except you don't get the car. What were we thinking?
"I see no reason anyone should have an adjustable rate mortgage," says Terry Savage, syndicated finance columnist and author of The Savage Number. "Some justify it by saying, ' In three years I'll be making more money and can afford the higher rate.' But you're gambling a cornerstone of your family's finance on unknowns."
Switching to a fixed rate will raise your monthly payment, but it will never increase as it will with an ARM. Over time, with inflation, in effect you'll be paying less. "A fixed-rate mortgage will allow you to pay off your debt in cheaper and cheaper dollars," says Pond. "As your income rises, you can put extra money toward your mortgage and pay it off sooner. Short of saving, there's no better thing you can do than be mortgage-free by retirement."
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