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During these challenging economic times, more and more individuals and families are finding it difficult to keep their heads above water.  Many have overextended themselves with credit cards or mortgages that are well beyond their means.  During the era of economic prosperity that preceded our current climate, this was of little concern, as people often justified that they had investments that they could liquidate if times got tough.  But when times did get tough, and the investments lost half or more of their value at the same time that the equity in the home suddenly decreased, these same individuals suddenly found themselves up the proverbial creek without a paddle.  

How does a family adapt to this situation?  First, many look to cut unnecessary expenses, such as the number of times they eat/order out or go to the movies. Irons are suddenly getting used instead of shirts being laundered and pressed at the cleaners, and the number of generic or store brand items in the pantry has increased significantly.  These efforts make sense-spend less cash by sacrificing, doing things yourselves and switching to less expensive brands, and the amount of cash spent monthly decreases, leaving less put on credit cards, or better yet, some money left over in savings or o pay down debt. 

There is one trend that, while on the surface may seem helpful, can actually lead to further financial strain.  As retailers offer more discounts and savings offers, some have the tendency to “stock-up” or buy in bulk when the prices are too good to believe.  Let’s face it, when you have an infant and a $17 case of diapers is on sale for $10.99, you should stock up and buy 11 cases, right?  After all, you’ll save over $66, which is almost the same as the cost of 4 cases of diapers at the regular price.  It’s like getting 4 cases of diapers for free-what a deal!  Well, not exactly.  Let’s look at the monthly cash flow of this family.  If they bring home a net pay of $4000 a month, and after mortgage, utilities and their other normal monthly expenses, including credit card payments, are left with $50 cash, they’ve now spent that cash plus had to put some of the diapers on credit.  Sure, for the next month or two their expenses will be reduced because they will not have to buy diapers, but they still won’t save.  Next month it will be $200 on end of season clearance clothes (they saved $300!) and the following month they will stock-up on laundry detergent and apple juice.  Now, month after month, the bargain shoppers will be spending more cash than they bring in each month, and these “bargains” will increase their credit card balances and accrue interest.  At some point the cumulative effect of these great deals will be interest and debt amounting to more than the initial savings.

If households look at their monthly budgets and evaluate “special offers” by preparing a monthly income statement, they will avoid these mistakes.  The ultimate goal is to have a positive net income, i.e. bring in more money than you spend on expenses each month.  Whereas an occasional month or two of negative net income (i.e. net loss) may be necessary (unforeseen car repairs) or even beneficial (buying treadmill to eliminate a gym membership), bargain hunters often times find multiple offers that are too good to resist and end up with negative net income month after month, thereby worsening the situation.

Instead, budget by an income statement.  Start with your total monthly take home pay, subtract the usual utility bills, credit card payments, food, gas and maintenance expenses, and whatever other expenses there are in your budget, and find out what your net income will be for the month.  Use this amount to evaluate how much you can really afford to spend on stockpiling reduced price items. Your wallet and your storage space will thank you.

Robert Wilson is a healthcare director who is currently working on his MBA.