We hear a lot about industry "downsizing" these days - companies that are cutting back, reducing expenses, trying to work on a smaller scale. A lot of families are doing the same thing.
Families and individuals can be forced to downsize for a variety of reasons: retirement, job loss, widowhood, divorce, illness and caregiving needs may all require adjustments.And some people are choosing to downsize to simplify their lives and reduce stress and pressures of modern living. According to author Duane Elgin, in his book "Voluntary Simplicity," "Americans are becoming aware of how their personal lifestyles affect their health, the environment and inevitably, the quality of life for the whole human family and future generations. Many people are lowering their level of consumption in answer to these concerns."
There are two key definitions to keep in mind, says the American Association of Retired Persons:
Your standard of living is an objective measure based on how much money you spend on your lifestyle. Your quality of life is a subjective measure based on how much fulfillment you get from your lifestyle.
You can lower your standard of living and still have a higher quality of life, says AARP. "If we understand `frugal' to mean deprivation in any form, we are off the track of living better on less. Our aim is fulfillment. According to the dictionary, `frugal' means `avoiding unnecessary expenditures of money.' It does not mean lowering our quality of life," says the association.
And to help people who want or need to learn to live better on less, AARP has developed a six-step program to help people evaluate their financial status and find ways to cut back.
STEP 1: Your personal needs.
The first step toward living better is to determine what you want out of life. Only then can you give purpose and direction to your money.
Everyone wants many things out of life - security, love, enjoyment, a nice home, family, friends and so on. But wants and needs can vary from person to person. And sometimes needs are beyond your control. An illness may rob you of health; a natural disaster may destroy your home. But there is always something you can do to raise the quality of life. The first step is to identify areas where your needs are and are not being fulfilled.
Take a moment to look as specific areas such as physiological needs (food, nutrition, health, sleep, warmth, shelter, etc.), security and safety, belongingness and love, self-esteem and self-actualization (contributions to others, development of talents and creativity, etc.).
STEP 2: Your personal values.
Values are the standards, qualities and principles that guide your decisions between right and wrong, good and bad, appropriate and inappropriate. They are also the ideals that you want to practice, such as love, service, friendship, family. Through values you determine how to best meet your needs.
Many of your values don't cost much: you can be kind, enjoy nature or serve a cause without spending a lot. On the other hand, food, health care or a home can cost quite a bit. The challenge in this step is to identify your top-priority values so you can make sure your money serves you best.
- Ask yourself what are some values that, if you devoted more time or money to them, would raise the quality of your life? Make a list. Possibilities include physical fitness, health care, nutrition, companionship, home, play, hobbies, career. Then look at your list of needs in step 1. With those needs in mind, circle at least three values that you would like to make a priority.
- Next consider your roles in life. You may be parent, friend, neighbor, homemaker, volunteer, employee. Within each role are standards, qualities and principles. These help define the person you want to be. List at least three of your most valued roles. For each one, identify at least three standards, qualities or principles that you want to live up to.
- Consider your highest value: your life purpose - what you want to contribute to life, the value that all other values serve in some way. Your life purpose is not something that can be completed, like a goal; it is an ongoing process. Writing down your life purpose, no matter how lofty or humble it may be, can give purpose and direction to your life. If you don't know where you are going with your life, or don't have an ideal around which to organize your time and money, your handling of finances can be ineffective.
STEP 3: Your personal goals.
A personal goal is something you intend to acquire or accomplish in order to live in accord with your values. It is specific. For example, if one of your values is friendship, a personal goal may be to stay in touch with your friend once a month by telephone.
Write down the goals that can help you achieve your priority values. Look for goals than can serve your values without costing much money. A bagel in the park or a walk may be just as enjoyable a way to maintain a friendship as lunching in a restaurant. For physical fitness, walking, biking or exercise videos may be as effective as a fitness club. But realize that sometimes you will have to pay money to get the results you want. A do-it-yourself exercise program may lead to failure where a structured program could lead to success. The idea is to put your money where it will do the most good.
STEP 4: Your financial goals.
When you know what you want your money to do for you, you need to understand the everyday money-management strategies that will help it do that. Fundamental strategies include:
- Insurance: homeowners, automobile, liability, health, disability and life that can protect you against financial loss.
- Estate plan: to provide for the management of your money and affairs in the event of your incapacitation or death. Included are such things as joint ownership, a durable power of attorney or a trust arrangement.
- A cash flow system: including checking account, credit cards and every other device you use for distributing your income.
If you want to learn to live better on less, you will also need:
- A spending record. Carry a notepad everywhere you go and write down every penny you spend. At the end of a month, review every expenditure and see how you feel about them. The spending record will alert you to values you had not planned for and expose spending habits you want to change. Repeat this for another month and notice any changes you've made.
- Then you're ready to make a spending plan. Make a list of the income you expect over the next one to 12 months and the items on which you intend to spend it. Some of your spending goals will be related to necessities, such as home, groceries and health care. The more you can economize on necessities, the more you will have for other goals. Then spend according to your plan. Revise your plan when new goals arise or if it isn't working well, but don't spend without it.
- Shopping strategies are necessary if you want to get the most for your money. Such things as anticipating needs, comparison shopping, looking for discounts, buying durable goods and bartering can help you lower your cost of living.
- Plan your saving strategies. Three plans can help: 1. Always have a savings goal (reserve fund, retirement fund, children's school clothes, vacation, etc.). 2. Save money each month, even if only a dollar. (It keeps the dream alive and reinforces the savings habit). 3. Use methods to "save off the top." Many employers will transfer money directly to a savings account.
- Control your contradictory habits. Do you have habits that cost you money and contradict your values? Some habits are fairly easy to change, such as shopping when you are bored; you can take a walk or visit a friend instead. A stickier problem may be controlling your use of credit.
- Define your savings goals. Do you have a reserve fund to handle emergencies? This should be a priority. Do you have a retirement fund? This too is vitally important. Do you have other future goals to save for?
Once you complete these steps, you will have a financial plan. Make sure it relates to your needs and values.
STEP 5: Investing your money.All your money should have a purpose that relates directly to your values and goals. For example, the purpose of a checking account can be to handle ongoing expenses; the purpose of a savings account can be a vacation fund; the purpose of an IRA can be retirement.
Having a purpose for your money is the first step toward selecting appropriate investments. Make a list of your savings accounts and investments and match it with purposes that reflect your values and goals.
STEP 6: What are your next steps?If your values and goals constitute the "good" that you want in your life, it's your specific acts, deeds and accomplishments that turn them into practical living.
What steps to you need to take to achieve what you desire? Begin walking to work? Have an annual health checkup? Start a spending record? Learn more about investments. Write down the six most effective steps you can think of to increase the quality of your life on the money you have or less.
It does cost money to live. You're not going to get around that. Sometimes you have to spend more than you'd like to fulfill your needs, values and life purpose. Overall, however, if you orient your handling of money around your needs and values and select low-cost options where possible, you probably will be able to live better for less.
- For a free workbook that can help you work through these six steps, write to AARP Fulfillment, Dept. DW, 601 E St., N.W., Washington, DC 20071-1214, and ask for a copy of "Living Better on Less."
- Other references recommended by AARP for help with financial planning include:
"Your Money or Your Life," Joe Dominguez and Vicki Robin, Viking Press.
"Voluntary Simplicity: Toward a Way of Life That Is Outwardly Simple and Inwardly Rich," Duane Elgin, Morrow.
"Living Well Or Even Better On Less," Ellen Kunes, Perigee Books.
"Motivation and Personality," Abraham H. Maslow, Harper Collins.
"Socially Responsible Investing: How to Invest With Your Conscience," Alan J. Miller, New York Institute of Finance.
"How to Get Out of Debt, Stay Out of Debt and Live Prosperously," Jerrold Mundis, Bantam Books.
"The Frugal Shopper," Ralph Nader and Wesley J. Smith, Center For the Study of Responsive Law.
"Making the Most of Your Money," Jane Bryant Quinn, Simon & Schuster.
Check your local library.