As we covered in this post, reducing expenses can have a much more dramatic impact on your net worth than increasing your income by the same amount. The impact spending has on your net worth, and the fact that spending is personally controllable (or mostly controllable), is why it is essential to examine your spending habits.
We’ve categorized all of our expenses into four categories, so let’s focus on Fixed Expenses and explore strategies for reducing both Discretionary and Non-Discretionary Expenses. I like to focus on Fixed Expenses first, because making improvements is essentially a “one-and-done” process. Fixed Expenses, by definition, don’t require regular choices about spending and thus you aren’t constantly extending huge amounts of willpower, a scarce personal resource, to keep them in check. You make one decision and move on. Evaluate each fixed expense, brainstorm ways to reduce it, and then make a decision. Done. You might want to review your choices annually, but that’s about it.
Fixed Non-Discretionary Expenses tend to be the largest segment of spending and housing is generally the largest component here, so let’s take that one first. What are some ways that we could reduce our housing expense? Would you be open to house hacking? Or simply finding a cheaper place to live?
A few years ago, I went from living alone in pretty expensive apartment to living with a roommate in a more modest abode, but only after determining that it would only be worth the time, energy and sacrifice of living in a shared space, if I saved over $1,000 / month. Your threshold may be different. And for some of you, this can’t be optimized any further, so move on to the next category.
As you go through this process, you may find some items in the Non-Discretionary Fixed category that I consider “No Consequence” items. I refer to them as “No Consequence” because changing your spending on them has virtually no impact on your life. Let’s use car insurance as an example, if you can get the same coverage, but at a lower price point, there is virtually no reason not to take advantage of that. Other examples include cell phone service, apartment insurance, internet service and even Student Debt. For many of these items, you can simply call up your current providers, notify them that the service is too expensive and that you’re considering alternatives. In many cases they may offer you a better option or a special “deal”.
Let’s dive into Student Loan Debt for a minute. Have you scoured the internet in search of providers that may be able to reduce your monthly payments? This could have a relatively large impact on your financial position and well worth the process of applying for refinancing. I look about once a year and if there is ever a way that I can reduce my fixed interest to any degree, I make the move. I’ve used many providers including Common Bond and SoFi. Take a look at this post for further details.
Next, let’s move on to Fixed Discretionary Expenses. Some examples of Fixed Discretionary Expenses are subscription-based services like Spotify, Netflix, Audible, and also things like Gym Memberships or regular charitable giving. Subscriptions are a good place to start your analysis, because sometimes people forget that they even have them! There are even services available that will review your credit cards looking for subscriptions you may have forgotten. One such service is True Bill. One more tip – subscription services often offer a grace period before you cancel, which can be incredibly useful in determining what you can or can’t live without, and it protects you from any start-up fees that you might incur if you cancel and then decide to reenroll.
So that’s really it! After you’ve categorized your monthly spending, begin with your Fixed Expenses, sort from high to low and work your way down the list examining each expense individually. Focusing on your largest expenses is the most impactful, and although it might require more effort and consideration, it is offset by the fact that you only have to consider it once. Reducing your monthly housing expense by $500 will be a one-time, impactful move that doesn’t require daily expenditure of willpower, such as it does to refrain from those daily lattes. Make a special effort to review “No Consequence” items as reducing spending here will have no impact on your lifestyle as well. Lastly, take a hard look at things you can live without and try it out for a bit. If you don’t like it, then add it back into your monthly spending.
Here is a list of common Fixed Non-Discretionary Expenses:
- Housing (Rent, Mortgage)
- Health Insurance
- Child Care
- Utilities
- Loans (Student, Credit Card, Car, etc.) – “No Consequence”
- House / Apartment / Car Insurance – “No Consequence”
- Cell Phone – “No Consequence”
- Internet Service – “No Consequence”
Photo by Fineas Anton on Unsplash