André and Yohancé Jackson routinely attended a movie and purchased the latest CDs and DVDs every week after dining out at posh restaurants near their home. But as the economy began to falter, so did the couple’s carefree spending habits. Like many Americans, they are tightening their belts and increasing savings.
The Jacksons are part of a broader trend. Even as wages, salaries, and other forms of income are inching up, Americans are socking away savings and curbing their free-spending ways: The annual personal savings for Americans increased to $458.6 billion in 2009 compared with $286.4 billion in 2008, according to the Bureau of Economic Analysis.
“Due to the economic downturn, we have made even more of an effort to save money and watch expenses,” says André. “For us, living within our means has always meant paying ourselves first.” The Jacksons earn a combined annual income of about $200,000, have few major financial obligations and no children. Even so, they control the urge to splurge. André, 39, works as an engineer for a federal contractor in Washington, D.C. Yohancé, 36, is also employed as a contractor; she works as a project manager for a government agency. These days, they’re extra vigilant about their money.
Married for eight years, the Jacksons are committed to establishing a solid wealth foundation. In 2005, the couple purchased a four-bedroom, three-and-a-half-bath home for $369,000. Though they were advised to consider a lower down payment, they put down 20% and deftly avoided the additional monthly expense of paying for private mortgage insurance, or PMI. The move saved them thousands of dollars in unnecessary premiums that they would have had to pay until the loan balance was paid down to 80% of the property value. (PMI protects the lender if the buyer defaults on the loan.)
André says, “We wanted to make sure that one of us could continue to pay the mortgage and utilities on just one salary. Anything less than a 20% down payment didn’t figure into our plans.” The Jacksons maintain an emergency fund of at least 18 months worth of living expenses in case one of them is laid off. “Our money management philosophy has always been to save at least 15% of our total income,” he says. “We also contribute regularly to our employer-sponsored 401(k), IRA, money market, and regular joint savings accounts.”
The Jacksons economical spending habits are paying off. The couple has about $50,000 in a savings account, and their retirement accounts total well into the six figures. Yet, despite the available financial resources, cutting costs continues to be a priority for the couple. For example, they’ve cut back on expensive entertainment venues such as attending movies or concerts. Instead, they scour the Internet to find the best deals. The couple has also modified some of their routines lately. “We have maintained our habit of going out for dinner on the weekends,” says Yohancé. “But instead of catching a movie, we walk through our neighborhood after dinner.”
Another savings tip: Yohancé adds that revisiting recurring bills, such as homeowner and car insurance policies, is also an effective way to decrease expenses and save money. “Reviewing auto and life insurance policies every few months is a good way to determine if you’re eligible for any policy discounts or savings,” she says. André adds that he and his wife avoid using credit cards as much as possible. When they do use plastic, they pay the balance off at the end of the month. “Before we make any major purchases, we decide if it’s something we actually need or want,” he says. Yohancé notes, “We never make any major purchases without clearly defining how we are going to pay for them.” To implement this strategy, the Jacksons created an Excel spreadsheet and mapped out a plan to save for and pay for purchases.
As for the future, the Jacksons plan to retire early. With the absence of debt in their lives, continued positive cash flow, and no plans to have children, they will likely have lots of options come retirement time. “We would like to travel around the world once we retire,” André says. “By carefully planning our financial future now, we’ll be able to retire when we’re 60.”
THE JACKSONS’ ADVICE
- Make regular savings a priority. “Always include a certain portion of your monthly income for yourself,” André says, “but always plan enough to pay your household bills and savings.”
- Review and revise. “Examine the coverage and deductible limits on your policies, as needs change over time,” suggests Yohancé. “Reviewing the coverage limits on your auto and life insurance policies every six months is a good way to determine if the limits can be adjusted in order to save money.” André adds, “Also shop around for the best deals on amenities such as cable, Internet, and cell phone service.”
- Avoid lifestyle inflation. “We monitor and track our expenses on a weekly basis,” says Yohancé. “We keep careful tabs on where and how our money is spent.” If André or Yohancé receives a raise or bonus, it is immediately deposited into one of their savings or retirement accounts. “We maintain the budget we had prior to receiving the bonus or raise,” André explains.
- Use cash whenever possible. If you must use a credit card to make a purchase, avoid paying interest by paying the balance in full by the end of the billing cycle.