Our Financial Makeover Series features carefully selected personal finance topics. We hope talking about these basic principles can allow you to figure out what can help the most in your own unique situation.
In Part 1, we discussed avoiding fees and using a no-fee online checking account.
Part 2 pointed out how no-fee savings accounts and a fun budget approach could allow you to spend more on things you truly love.
We followed up in Part 3 with budget choices and the amazing freedom it can provide to realize your projects and dreams.
Part 4 suggested to start and build up emergency savings in accordance with your own crap-happens plan.
Today we’ll talk about expenses and propose ideas, hopefully inspiring, to reduce them.
We know a lot of people have a very hard time cutting down their spending as it can be simply too painful to them. But oftentimes, just focusing on boring expenses can give you the spark and motivation to get the slashing process going.
Getting More of What You Love
As we already highlighted in Part 2, getting more of what you love is the key here. So, try to focus on getting more resources like precious time and money!
On the cash front, reviewing your expenses and slashing unnecessary ones can be a straightforward way to free up big bucks to attain more of that.
An even more motivating approach is to concentrate your expenses carving on the boring kind. After all, cutting down on expenses that don’t provide you much joy should be much easier.
Working hard to tackle down your expenses should also help take out much of the guilt associated to spending. Enjoying more of what you love is not a sin, especially if you worked hard to achieve so.
As you can see, boring-expense money could provide some leeway and ultimately allow you to spend more on what you love. That’s plain and simple!
Fun Right After Necessity First
In all of this, you still have to prioritize essential spending.
You have no choice to spend some money on what you and your family, essentially need. There’s no way around it.
You can’t avoid essential spending even though you could get more value for your buck or similarly, the same value for less buck. A good idea might be to invest some time to identify what is essential and how much it should reasonably cost you.
So, spending-wise, we like to prioritize necessity closely followed by fun.
Many don’t have a real problem spending on necessities. They don’t feel guilty because their family needs it. But they could learn it’s also very reasonable to enjoy spending when they get what they truly love out of it.
In that perspective, we like to rank our expenses according to their level of fun.
In fact, we classify our expenses in two different ways. First, by their level of necessity using essential, moderate and luxury categories. And second, by their level of fun on a scale of 1 to 10.
This allows us to easily adjust our spending versus our disposable amount of cash. It also allows us to keep fun near the top of our list and aggressively slash the most boring kind of expenses.
Note that levels of fun may be different from one member of the family to the other. So, try to allocate some form of discretionary spending to each member of your family. Be careful with the use our averages here.
Beware artificial wants that don’t and won’t provide genuine pleasure. On of the great danger of easy access to credit is that people spend too much money they don’t have on their insatiable wants.
Focus on Bigger Savings
People often feel very good and are very happy about saving a buck on a single grocery item or just 10¢ on a pack of gum. It may even seem like they are prouder than saving 10K$ on their mortgage. The latter may be a little trouble and more complex to obtain but, it’s a much more efficient use of your time and energy.
So, be cautious about how you spend your money. Don’t waste your hard-earned money on needless spending but also don’t waste your precious time on insignificant savings. There’s no point paying too much for a pack of gum but there’s no point either obsessing about it.
You have to realize your time is also limited and extremely precious. More often that not, just saving a couple bucks here and there is not worth the associated waste of your time.
Saving a quick buck may be simpler and more accessible to everyone. But in the end, it’s just poor use of your time and attention. Bigger savings can have a much more lasting life-changing impact.
I used to be an extreme saver and pinched pennies. So, don’t do what I did but rather do what I now have learned.
That’s why we don’t devote much to coupon clipping. We won’t spit on it but will never get out of our way because of it either.
Speaking about detours, consider transport if you bargain hunt in multiple stores. Saving 50¢ may not be worth to drive 10 miles for it. It can be both a waste of time and money. On top on it all, it can be very harmful to our environment.
In the end, only saving at least a couple hundred bucks may be worth your attention. It could easily be done if, for instance, you wisely negotiate you auto insurance premiums. You could even save thousands if you carefully shop around for your next car.
A single decision lowering your investment fees could even add up to tens of thousands of dollars over your life-long investing venture.
So, put more emphasis on big expenses like housing that could potentially provide you bigger savings. You could be surprised how much just a couple points on your mortgage rate could save you in the long haul.
The House vs Commute Dilemma
Talking about housing, many of us face an agonising dilemma over it. Stay closer to our downtown work and pay much more for our house or pay a lot less for a nice home in the suburbs but spend a lot more to commute. Extensive commuting can cost a lot of money but also waste precious time and clean air.
As with many budget and expense question, there’s no unique and universal solution for this one. The equation comes down to housing being more affordable when it’s further away, while commute spending proportionally skyrockets as you settle farther away.
The inverse relation between housing and commuting expenses is excruciating for many. It can never be a complete win situation. The balance between these two opposing forces is, to say the least, challenging to achieve.
But, as we discovered by default during the recent virus crisis, telecommuting may be an overwhelmingly efficient solution. At least partially telecommuting can allow most of us to afford a more comfortable home while reducing expenses related to commuting. At the same time, it could drastically reduce the devastating environmental effect of needless daily travel.
As some might say, maybe that inevitable solution kind of had been staring us in the face for a long while. It still took us a ferocious disease to provoke some changes. It seemed we, as a society, were probably not willing to act on our own.
As a modest Star Trek fan, I was secretly hoping teletransportation would be the grand answer. Telecommuting is surely a much more simple and obvious solution.
Get Rid of Recurring Effect
Extensive commuting can have a lasting deadly recurring effect. It can keep our pockets empty, consume a lot of our precious time and push our already fragile climate to a point of no return. Maybe time as come to get rid of it.
This brings us to our next consideration. All recurring expenses may not have the perfect trifecta (money, time and pollution) of commuting, but their impact can be as lethal, to your bottom line at least.
Indeed, after bigger savings, reducing recurring expenses can have the most meaningful outcome. So, these types of expenses also merit a significant portion of your attention.
We’ve often talked about the devastating effect of seamless recurring expenses. We even proposed you could become wealthy by reducing recurrent spending.
To illustrate our point, we’ll revisit an old example.
Most of us consider spending only 50 bucks a month on the latest cell phone as a trivial necessity. But some quick calculation will tell it will cost more than 28K$ over a lifetime (48 years) without considering inflation or interest. The same rudimentary monthly expense climbs over 64K$ at 3% or even to about 166K$ at 6%. Looking at it that way, does that basic phone plan still feels that cheap and necessary?
We’ve often talked about how reducing recurring expenses could do wonders for your finances. It gets even better when you combine both recurring and boring. Your wallet could be in for some ecstatic enhancements. Just imagine getting even more of what you really love!
This homework will be a little different.
From your budget items, identify your 4 biggest expenses, your 4 most boring and 4 disposable recurring ones. Try to choose most apart from necessities.
We believe that at some point, in the 12-Minute spirit, those starting blocks can allow you to slash away 12% worth of boring spending. It can be that simple!
We’ll leave you today with this quick thought about the price of quality: you usually will have to pay more for quality, but it doesn’t necessarily mean you will get quality if you pay more.
Next time, we’ll talk about punching out debt and how it could make you feel so much better.