Why Cutting Back Might Not Fix Your Budget

Inflation has been cutting into many households' budgets. When money gets tight, the first instinct is to review the budget and start cutting back. You cancel the $20 Netflix subscription. You replace dining out with dining in. You make your coffee at home instead of spending $6.50 daily on a latte. At grocery stores, you stop buying organic or opt for store generic brands. None of these decisions seem to have a major impact on the quality of your life.

Then you review your spending the following month and see some other bills, like your car insurance, went up, washing out the savings from all your budget cuts. And you still might be running short. You also no longer have your favorite streaming channels to watch in the evening and chill, and on Friday you no longer look forward to meeting up with friends at your favorite neighborhood restaurant.

After a few rounds of cutting, there is not a lot left to cut, but the bills you are paying seem to be going up and your income is not keeping pace.

And you did nothing wrong. You followed the advice most budgeting articles tell you to do. The problem is, in most cases, these cuts will not solve your budget shortfalls. And the reason is not that you have not cut spending deep enough.

A typical household in the U.S. spends about $66,900 a year, according to the Bureau of Labor Statistics. About 76% of that goes to housing, food, transportation, and healthcare.

You can eat cheaper food, live in a smaller house, or drive an older used car. But you still need to eat and pay for gas, insurance, and property tax. There is only so much room to cut.

After the basics, taxes, and retirement contributions, a typical household has about $800 a month left for discretionary spending. That is where most budget cuts are focused.

The small expenses that give you joy and comfort become easy targets. You can give up a lot of what makes daily life enjoyable without making much of a dent in your biggest bills.

During World War II, rationing began in 1942. A government poster from 1943 said, “Use it up, wear it out, make it do!” Families cut back on cars and entertainment. Even gas was rationed. But food spending rose and housing costs barely moved. Even in the most frugal years in modern history, people could not cut the basics.

The basic bills you cannot easily cut are growing the fastest. Food prices are rising fast. Home affordability is at a 20-year low. Healthcare and insurance are growing faster than incomes.

A higher car insurance bill can wipe out what you saved on Netflix and coffee.

Household saving went up from 13% of income in 1941 to 23% in 1944. Families managed to save more without cutting back on food. As their income grew, many families saved their extra income instead of buying a bigger car or a bigger house. In many cases, simply because there was very little available to buy.

In Your Money or Your Life, Vicki Robin and Joe Dominguez put “Minimizing Spending” right before “Maximizing Income.” The idea is to think about money in terms of the time it takes you to earn it. First, look at your expenses and ask yourself if they are worth your time. Then think about how you can earn more in the same amount of time.

An extra $500 a month is more than half of the roughly $800 a typical household has left after the basics.

It is easy to tell people to earn more. But the reality is, for a lot of people, it is very hard to meaningfully increase their income. Some are working multiple jobs, have health issues, or are taking care of family.

If this is your predicament, and increasing your income is not in the cards for you, then you need to right-size your budget. You have to adjust spending where it matters. Housing, food, transportation, insurance. Those decisions have a much bigger impact than cutting coffee or Netflix.

Amy Dacyczyn, the “Frugal Zealot” of The Tightwad Gazette, managed the bills for a family of six on an average income of less than $30,000 a year and saved enough to buy an old farmhouse. “Certainly the reusing of aluminum foil did not greatly contribute to our dream,” she wrote.

If you are retired, or working remotely, you should consider how moving to a lower-cost location can improve the quality of your life while cutting back on the big items in your budget.

Having the discipline not to increase your spending, buy the new car or get a bigger house is not easy. And this is nothing new. C. Northcote Parkinson wrote in his 1960 book The Law and the Profits about a family that gets a raise and decides to save some of it, but in the end spends all the extra money earned. “Expenditure rises to meet income,” he wrote. They end up living paycheck to paycheck.

Even when you win the lottery and have a windfall you were not planning for, a lot of people end up spending the money. Many lottery winners end up bankrupt a few years after they win big.

There is nothing wrong with making your coffee at home or canceling a subscription. But look at how much those cuts actually change your budget. If you are still short, consider the bigger bills and whether earning more is an option for you.

Before any extra money arrives, decide what it will pay for. You might use it to cover the bills that have gone up and keep a little aside for Friday dinner with your friends.

Sources

Netflix's current U.S. prices, including the $19.99 Standard plan (Fox 5 New York, March 27, 2026): https://www.fox5ny.com/news/netflix-raising-prices-again-all-plans-how-much-more-youll-be-paying

What the typical household spends: the middle fifth of households by income spent $66,900 in 2024, with $50,523 (75%) on housing, food, transportation and health care, and about $10,100 a year left after those, payroll taxes and retirement contributions (Bureau of Labor Statistics, Consumer Expenditure Surveys, Table 1101, 2024): https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2024.xlsx

Which bills rose from 2022 to 2024, including car insurance from $1,592 to $1,993 a year and groceries up about 9% (Bureau of Labor Statistics, Consumer Expenditures 2024): https://www.bls.gov/news.release/cesan.nr0.htm

Wartime household spending and saving, 1941 to 1944: car spending fell by more than half, food spending rose, housing barely moved, and saving went from about 13% to 23% of after-tax income (Steven W. Henderson, "Consumer spending in World War II: the forgotten consumer expenditure surveys," Monthly Labor Review, August 2015): https://www.bls.gov/opub/mlr/2015/article/consumer-spending-in-world-war-ii-the-forgotten-consumer-expenditure-surveys.htm

The 1943 poster "Use it Up - Wear it Out - Make It Do!" from the U.S. Office of War Information (American Legion museum collection): https://legionmuseum.omeka.net/items/show/256

Housing affordability at a record low in 2023, the lowest since the National Association of Realtors began tracking it in 1989: https://www.nar.realtor/blogs/economists-outlook/trends-in-housing-affordability-who-can-currently-afford-to-buy-a-home

Family health insurance premiums up 6% in 2025 while workers' wages rose 4% (KFF, Employer Health Benefits Survey 2025): https://files.kff.org/attachment/Employer-Health-Benefits-Survey-2025-Annual-Survey-Summary-of-Findings.pdf

The steps of Your Money or Your Life, including "Minimizing Spending" and "Maximizing Income," from co-author Vicki Robin: https://vickirobin.com/your-money-or-your-life-summary/

Amy Dacyczyn on her family's income, savings, farmhouse and the aluminum foil ("They Call Me The Frugal Zealot," In Context #26, Summer 1990): https://www.context.org/iclib/ic26/dacyczyn/

C. Northcote Parkinson, The Law and the Profits (1960), chapter 1, "Expenditure rises to meet income": https://archive.org/download/dli.ernet.65473/65473-The%20Law%20And%20The%20Profits_djvu.txt

Florida lottery winners and bankruptcy (Hankins, Hoekstra and Skiba, "The Ticket to Easy Street? The Financial Consequences of Winning the Lottery," Review of Economics and Statistics, 2011): https://ideas.repec.org/a/tpr/restat/v93y2011i3p961-969.html