You've Got to Know Your 'Monthly Nut'

Dear New Frugal You,

Please help me. All month long, I skip my daily Starbucks coffee, clip coupons and avoid eating out. Yet the bills keep coming in, and I'm always short when the big ones (mortgage, car payments and credit cards) are due. It seems totally unfair. I'm trying so hard and don't seem to be getting anywhere. What can I do? 

- Frugally Frustrated

Dear Frugally, 

I bet that is frustrating: You're saving a dollar here, there and everywhere but are still coming up short when the bills roll in. Let's see if we can't find a way to solve it for you.

The problem may be in something that a friend of mine calls "the monthly nut."It's not an economic term, but it is memorable and descriptive. It describes the amount of money that you owe each and every month, pretty much regardless of what you do during the month.

For example, each month your mortgage or rent is due, as is your car payment. Add cable TV, Internet and health club dues. Then tack on the minimum payments on your various credit cards, plus student loans.

You could sit home all month, never open your wallet and all of those bills could still be due. That's why my friend called it the monthly nut. Each month, you need to crack that nut before you can spend or save for anything else.

The problem could be that your monthly nut is simply too big for your paycheck. If you're spending more than 35% of your take-home pay on housing, 18% on transportation and 10% on credit card or other debt payments,you're going to have trouble.

Thoseare the big areas, but you can also get into trouble with cable TV/Internet and cell phone bills, health clubs or entertainment.

A good exercise is to total up your ongoing monthly commitments. Subtract that from your monthly take-home pay. What's left is available for food and every other expense that occurs during the month.

If you find that there just isn't enough money left, you can either continue in your frustration or find a way to change things.

The first places to look for budget changes are in your big monthly bills. Can you refinance a house or car to a lower monthly rate? If the nut is big enough,you might need to swap to a less-expensive car or move to a cheaper home.

Next,look at the smaller monthly commitments. Are there any you can drop? Or at least trim back? Don't assume that you can't eliminate these things. You'd be amazed at how many people live without cable TV or club memberships.

Your goal is to get these expenses to a level that you can sustain year after year. Failure to do so will leave you with the same frustrated feeling.

If you reduce your nut enough to have some extra money, consider doubling down:Use that extra money in a way that reduces your future obligations. Pay more than the minimum on your credit cards or pay off your auto loan sooner. By reducing the nut, you'll make every future month easier. Anything that you do today will pay dividends for quite awhile.

On the other hand, if you cut all you can and there's still no extra, you'll need to look for ways to increase your income. Working a part-time job until you can reduce the credit card balance or pay off an auto loan would reduce the size of your monthly nut.

All the while, you'll need to be extremely cautious about taking on any new expenses. That "easy monthly payment" adds to your monthly commitment, making it harder to have anything left at the end of the month.

My friend isn't an economist or a financial planner. But he was right in recognizing the importance of keeping your ongoing monthly commitments low. A smaller nut is easier to crack!

See related: 10 ways to get extra cash, How to diagnose your financial health

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