NEW YORK (CNN/Money) -
My husband and I made $110,000 last year, but we still live paycheck to paycheck. How can we stop doing that?
-- Kim, Columbus, Ohio
Funny isn't, how our lifestyle expands as fast as our income, if not faster? If you're making $50,000 a year, there's that little voice in the back in your head that says, "Gee, if I were only making sixty grand, I could get ahead a little bit and not feel so pressed."
Of course, when your salary grows to sixty grand, you've got the same voice, except it's saying you need $70,000 or $80,000 or $100,000 or $200,000 or whatever. It reminds me of that phrase in the T.S. Eliot poem "Gerontion" that says "the giving famishes the craving." I'm no T.S. scholar, but I've always thought of that phrase as suggesting that instead of eliminating our appetite, sometimes getting what we want makes us even hungrier; we want more.
And I think that can certainly be the case with lifestyle and income. As our income grows, we see more and more goodies that we "need." I suppose you could call this gross materialism or greed, but I tend to think of it as human nature. Our reach always exceeds our grasp.
Okay, end of lecture on the philosophy and poetics of human craving. The issue for this column is what to do about it. How can you give yourself a little breathing room so you don't feel you're on a financial treadmill, always in danger of falling behind?
Create breathing room
Basically, what you need to do is provide a bit of a cushion so that your various expenses and consumption needs aren't constantly bumping up against your earning power. Which is another way of saying that you need to spend less than you make. Which is another way of saying you've got to factor some savings into your lifestyle.
Adding a savings cushion does two things: first, it prevents you from spending every single cent you earn on a regular basis. That alone will reduce this sense that your financial life is on the verge of careening out of control.
Second, by saving regularly and (after establishing a reserve of three months' expenses in a money market fund or bank account) investing your savings in mutual funds and the like, your savings cushion will grow and grow over time, which will give you an even greater feeling of control over your finances -- and allow you to deal with challenges such as possible layoffs or other short-term financial crises and reach long-term goals such as retirement.
As a practical matter, there are two ways to go about building this savings cushion. One way is to create a full fledged budget -- that is, list all your various expenses so you can see where your money is going, and then look for areas where you can cut back.
There are any number of software programs that can help you do this. Or you can check out sites such as the Bureau of Labor Statistics' Consumer Expenditure Survey, which breaks down the spending of U.S. households. You can then compare how your spending in various categories from housing to transportation to dining out stacks up against that of the typical American family.
You'll also find an interactive version of this budget in the Calculators section at Bankrate.com.
The Two-Line Budget
But, frankly, I think there's an easier and more efficient way to get to the same place. And that is by adopting what I call the Two-Line Budget. This budget is simple.
On the first line you enter your income; and then on the second you enter the percentage of that income you'd like to save -- say, 5 to 10 percent to start. Multiply your income by that percentage and, voila! There's your savings target.
Okay, I hear you saying, but what about the rest of the budget? How do I know how to divvy up what's left after saving among the various needs competing for my money?
And my answer is this: as long as you start from the premise that, instead of working with, say, $5,000 a month, you're really only working with $4,500 ($5,000 minus the 10 percent you'll save), then the rest of your budget will work itself out. But the most important thing is to take the savings off the table first.
Act as if you haven't even gotten that money. It doesn't exist. You don't make $5,000 a month. You make $4,500, and you've got to adopt the lifestyle that you can afford on $4,500 a month, or however much you would have after deducting your savings.
I find that the best way to create this type of regimen is to have your savings target deducted from your paycheck before you can get your greedy little hands onto it. Sign up for your 401(k) plan or other company savings plan that automatically deducts contributions from your paycheck (which will also give you the bonus of a tax deduction.)
Or if that's not an option, then sign up for an automatic investing plan, which allows a mutual fund to deduct a certain amount of money (often as little as $25 to $100) from your checking account each month. Putting your savings on autopilot makes it more likely that you'll stick with your savings plan than if you must actually sit down and write a check each month.
Once you adjust to this regimen -- that is, get used to the idea of living a little below your means -- you can shoot for an even higher savings target. You can raise your savings percentage a bit gradually over time. This doesn't necessarily mean you'll have to restrict your lifestyle, since chances are your income will also be expanding at the same time.
To sum up, find some way to save on a regular basis. The very act of saving alone gives you a greater sense of control over your money, and as your saving cushion expands, you'll also gain a greater sense of security and feel less like you're on a perpetual earning-spending treadmill.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Mondays.