Get Out of Debt – Focus on Big Chunks

It's the big chunks that build a mountain of debt, so forget about the pebbles and sand for the time being.

There are perhaps as many ways to get out of debt as there are ways to get into it. Here’s one, among many, that I endorse: focus on the big chunks.

Okay, the term “big chunks” doesn’t sound like it would appear in a magazine article or economics course textbook, but it should express the idea clearly for most of us; we need to focus on getting out from underneath those elements of our debt that are large and burdensome. In other words, the most serious of our concerns. The big chunks capable of building a mountain of debt for us.

Eliminate the building blocks of the mountain, and you can eliminate the debt.

When an employer needs to save money, what do they do? They lay off personnel. Why? Because employees are often the single largest controllable expense they have. Employees are the big chunks when it comes to the expense side of the ledger; employees have salary, benefits, paid time off, and non-productive time that one is hard pressed to find the equivalent for when it comes to equipment, buildings, utilities, materials and other expenses associated with a business.

So, if the big chunk approach works for businesses, a similar perspective might be good to employ when it comes to our attempt to get out of debt.

What are Big Chunks?

Let’s take a quick look at what those big chunks might be for the average household in America.

Housing – this cost typically represents about 30% of our annual expenses. Clearly with all of the foreclosures of late, there are many among us who just didn’t (or refused to) see their housing costs as a big chunk that needed whittling down. Instead of managing that expense, many allowed it to manage them – right out into the street.

Give some thought to alternative housing like a mobile home, travel trailer, renting a room, getting roommates, renting instead of owning, or perhaps living in a tiny house. Housing ought to be the first big chunk to consider when it comes to reducing expenditures so you can start paying down your debt.

Transportation – a household expense that is typically about half of what housing is for the average American, let’s say about 15% of our annual expenses. When you start to think about monthly payments for a car, filling the gas tank, annual registration fees, paying for insurance and parking and tolls, it can start to add up. Just think about having more than one driver in the family, and now think about how many individuals own more than one car. Whew, it’s one of those big chunks!

Start thinking about one car, a used car, and going without a car. Life in America doesn’t have to be “on wheels” at all times. When I moved to California, I went without a car for my first year, and most people were dumbfounded that anyone could find a way to be regularly employed and not own a car. In fact, I bought my first home long before I bought my first car.

Food – one might not consider food as a large expense, but it’s about 12% of the average annual household budget in America. It’s no mystery that we eat too much in America. People from overseas have remarked that they seek to immigrate to the U.S. because they “want to live in a country where the poor people are fat.” No offense intended to my corpulent friends out there, as I’m also a member of that club. When clients of mine from Colombia came to work with me for two weeks in my hometown (because I refused to risk travel to that country), they marveled at the size of the lunch plates at a restaurant. They simply ordered one meal and split it between the two of them.

Have you thought about how much you consume and how often? Consider meals out and fast food as a luxury, instead of a necessity. Avoid snacks, bottled water, and overly priced “foods” like soda and coffee. Consider buying in bulk at discount prices. Perhaps you can buy in bulk from a local producer instead of smaller quantities from a retailer. Can you grow some or most of your own food? It’s easy, even with just a small garden plot.

Clothes, Entertainment and Miscellaneous – these items are bundled together as one of the big chunks because they’re something that I rarely spend money on, yet together they make up roughly another 12% of the typical annual household expenses in America – a parallel to the cost of food. That fact alone seems to cry out for an examination of what we’re spending on clothes, entertainment and miscellaneous products and services.

Start thinking about buying clothes only when necessary; I just recently replaced some of my T-shirts that were 10 years old. Try buying clothes second hand, create at-home entertainment instead of going out, and make a concerted effort to examine all of the miscellaneous things you buy to see if they are truly necessary or simply something that is discretionary in nature.

Utilities – the last on my list of big chunks, and perhaps the annual expense that most of us are familiar with when it comes to saving money. I include utilities in this discussion because on average they represent 6% of our annual budget, about half as much as we spend on food. Reductions in our housing costs will often lead to utility savings, but there are other things we can do to improve our economic profile in this area.

Give some thought to eliminating wasteful practices as well as ways in which you can conserve when it comes to heating and cooling. Attic insulation is one of the best money saving actions you can take because it helps all year long. Utility savings can be had when it comes to water and communications as well. Drip systems save lots of water, prepaid cellular plans can be quite affordable, and bundling Internet and phone services can be a good way to eliminate redundant services and the expense that goes along with them.

What’s the Bottom Line?

All right then, what might all of this mean for those of us trying to get out of debt? Well, let’s assume that we could shave off 25% of the expenses associated with the big chunks discussed above. That might be ambitious for some of the areas, and rather simple for others, it all depends on how much you believe you’re skimping now. Assuming we could do this, that means we’re reducing 75% of our budget by 25 % and that gives us nearly a 20% savings on our budget overall. That nearly 20% savings could be applied to paying down debt.

To be clear, we’re not talking about paying an additional 20% on our debt, we’re talking about making additional payments equivalent to roughly 20% of our entire household budget. That’s more than the average American family allocates to savings, investments and retirement combined. Another way to look at it, it’s like taking all that we spend on food now, and half of what we spend on transportation now, and having that money available to pay towards our financial obligations. For most people, that would be a considerable additional amount of money to help them get out of debt.

This approach won’t work for everyone, but I offer it as a type of mindset that some will undoubtedly identify with. So, the next time you’re wondering how to get out of debt, think of the big chunks of your household budget. It might be a good place to start.

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