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On money

Build a little room into your budget

By HELEN HUNTLEY
Published June 19, 2005

Does your budget have any breathing room?

That's no idle question.

Recently I heard from a retired couple who claimed they get along just fine financially until "an unexpected expense comes along and shoots a hole in our target." When they faced a bill for $5,000 in dental work, they paid for it with a check tied to their Visa card. Before they knew it, they had a $9,000 Visa bill they have no hope of ever paying back. Because they had no breathing room and no emergency fund, they're suffocating.

"Breathing room" is what you can create for yourself by keeping essential expenses to less than 60 percent of your pretax income.

Before you fire off an e-mail telling me I'm nuts, let me say that I realize the number isn't realistic for everyone, particularly young people trying to buy a first home in today's inflated market. However, it is realistic for many people if they're willing to make the lifestyle tradeoffs.

I challenge you to do your own calculations. Your "essential" category should include taxes, groceries and housing, plus everything you are contractually obligated to pay, such as car payments, cell phone bills and student loan payments. Include a base allotment for a typical year's medical, dental and car maintenance bills. Count your child's tuition if you pay it out of current income rather than savings. But don't count entertainment, restaurant meals, clothing, vacations, charitable contributions and savings.

Here is my idea of an ideal allocation: 60 percent to essentials, 20 percent to discretionary costs, at least 10 percent to retirement savings and the remainder to other savings, from paying for college to accumulating a down payment for a house or car.

So how do you create breathing room? Prevention is by far the best way to go about it.

Even in a hot real estate market, it's dangerous to opt for the biggest mortgage the bank is willing to give you. When you add the costs for taxes, insurance, utilities and maintenance, you may find you can't afford to live there.

Housing costs set? Watch those vehicles. Our nation's SUV mania extracts a high price in gasoline costs as well as monthly payments and maintenance. Consider sending your kids to public school even if your neighbors don't. Think before you sign a contract that requires monthly payments. Get serious about sticking to a food budget. I hope you get my drift.

Creating breathing room does two things. First, it makes daily life less stressful. Every unexpected bill won't throw you for a loop. But what may be even more important is that building breathing room into your budget gives you more freedom. Reducing fixed expenses might make it possible to change jobs or even launch a business or a new career. Down the road it might make retirement earlier than you thought possible.

We see the close every day and judge the entire market by the Dow Jones Industrial Average. How can anyone get a perspective on just what the Dow did without seeing those 30 stocks that actually made up that closing number? Where can I see the 30 stocks listed with their plus and minus performances?

Information on the Dow components is readily available on the Internet. If you want to track their ups and downs, go to Yahoo Finance (http://finance.yahoo.com) click on "Dow" under "market summary" and then on "components." You can find the weightings for each stock in the Dow at www.djindexes.com. Click on "components" under "key indicators."

In your recent report on Tampa Bay stocks, you showed Tech Data Corp. with a "per share" amount of $2.74. I am a shareholder and I never received a dividend. I called the company and asked what happens to this money and they say it is reinvested. Can they do that without asking shareholders for approval?

The $2.74 you saw is earnings per share, also known as net income or after-tax profits. Rather than paying a dividend, Tech Data reinvests its profits in the business. If you want dividends, you need a different stock.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 19, 2005, 16:52:22]