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Reducing Expenses

If you find that you are losing money on a regular basis, then it is time to start 'shaving' your expenses. If this does not work then things may need to get more drastic.

Pay By the Month

You may find that saving for annual expenses such as insurance troublesome as you may be tempted to touch the money. In this case it may be ideal to pay by the month. Shop around though, some companies charge a little extra for the service, while other do not. The net monthly expense should be similar to paying annually but the risk is lower by being more evenly spread.

Note: Read the terms of any insurance carefully, pay by the month may have some special conditions. Again, shop around if you are not satisfied.

What is Expense 'Shaving'

This is the process of re-examining your expenses and seeing if you can get them down a little, that is, shaving a bit off the cost. If you could shave as little as $10 from 20 expenses then you could save yourself $200 a month. $20 becomes $400 and so on. Go through your expense items one by one and say to yourself, “Can I get this down a little?”.

 

A great example is car insurance, just shopping around can save you a lot. If you can find an insurance broker, then they can do the searching for you, but they may not be able to do the best job possible as they also need to make a profit. These items are up for negotiation so don’t automatically assume their first offer is their best. If you are not happy then walk away, you are the customer and they make money from you. Don’t reward poor service, poor prices or poor quality by handing over your hard-earned money. Vote with your money!

Shop Around For The Best Deal

Here’s an example. My car insurance crept up from $80 to $130 a month over a couple of years. I thought I could do better. I rang three major insurance companies and made sure I got a quote from each for the same car, value and policy extras. I was surprised how much this varied. Also, insurance companies do special offers on occasion to regain market share, so one year company A will be the cheapest while the next year company F will be. In the end I went with a broker because not only did they match the best deal I found but they bettered it. $75 per month, which is a saving of $55 a month. If I could pull that off for 20 expenses I’d be $1,100 a month better off!

 

Also look closely into health insurance, gym membership, communications, finance and utilities.

Shaving Expenses

Know What You Are Getting For You Money

Make sure you know the reputation of the company you go with. They may have a cheap price but will they deliver as promised? Ask around. Re-examine the features you are getting for your money, because by dropping some you may save even more. Also, question whether you are getting value for the service you are paying for, in many cases you may not need that service anymore. For example I cancelled my gym membership as I was not using it, I walked and jogged more, and bought some cheap hand weights.

Sell Items Which Have High Operating Expenses

Ownership of most items is quite often more than a purchase expense as some items need regular maintenance. Think carefully about what maintenance costs you would like to avoid and sell the underlying item. First you will get some money back, and secondly the regular maintenance expenses will disappear.

An aspect to consider is the loss if you do sell the item (depreciation). For example, you buy a second car for $10,000. All up it costs you $500 per month to own and operate. If you were to sell right away you may receive $7,000 for a $3,000 loss but it would become an improvement in your cashflow in 6 months ($3,000 / $500 per month).

Examine Your Needs and Cut Services

You may have to go one step further if this is not enough - cutting services. You may just not have enough income to pay for your lifestyle. If you can’t increase your income immediately you will have to cut some of them. No more internet, computer rental will have to go, eat out less, etc. Life is full of hard choices, and some made now can allow you to have a better life in the future, and possibly sooner than you think. Surely if you cut services you could share them with friends, family or work. Taking your lunch to work, using work's internet in your lunch hour, one car only, share a item with someone, and so-on.

 

Don't forget to live though. The pursuit of money wont make you content and cutting services until you are miserable is not healthy.

Protect Yourself with Insurance

What would be the risk of not having certain insurances? Risk management is vital to your financial security, without it you could face ruin (and waste all your hard work growing your wealth in the first place). Make sure that all your assets have cover and shop around for the best deal. The golden rule of risk management is ‘What is the worst that can happen?’.

Rule: Always insure:

If you own a dwelling, get building insurance. If your home has contents, insure them. If you rent out a property, then get landlords insurance. If you are dependent on someone for their income then insure them, their death or incapacity could destroy everything you have worked for by leaving you with bills you can’t pay on your own. If you have children or others that depend on you, then insure yourself for the same reasons. Remember, do your homework and take your time by shopping around. It doesn’t have to happen tomorrow but do set a reasonable deadline.

The Consequence of No Insurance

Here’s an example of not having insurance. An old friend of mine thought he was a great driver, in fact he was. He was young and flamboyant. He earned a modest salary as a junior mechanic, one day he hit the front of a prestige car and destroyed it. The repair bill in today’s money would have been about $20,000. He didn’t have insurance because he thought he was too good to hit someone or get hit. He was distracted for just a moment, and he made a mistake. The other owner’s insurance company sued him and he had to take out a court ordered loan. A loan like that today would be around $500 month for 5 years. He could have paid significantly less for insurance and not been financially impacted for 5 years. After all this he still had to repair his own car.

Further Reading

Depreciation (wikipedia)