Budget Builder Tip #2: Trimming The Fat
Yesterday we talked about how to make a list of your expenses so you are aware of exactly how much you are spending. Today we’re going to look at how to trim down areas where you are spending more than you really need to.
Don’t worry, this doesn’t mean that you can never go out to a restaurant or buy another new shirt. My method is all about proportional spending, which lets you keep a balance in your life and your bank account.
We used an example with groceries yesterday, so we’ll stick with that theme for today’s exercise.
A quick way to increase the amount of money in your pocket without working more is to reduce the amount of money you devote to necessities. One of the biggest culprits is food and entertainment. I’m not at all suggesting that you fast and stay the house all the time but once you complete the following exercise, you’ll soon see how easy it is to spend without thinking.
Before we get started, I’ll give you an example of what I mean. Take something as habitual as going to Starbucks. Everyday you go on your way to work and indulge in a nice dark roast coffee. Each coffee costs $5, which isn’t so much until you consider that over the course of a year, this little habit has cost you $1250, which, for some of you, is a whole month’s mortgage payment. Why not try brewing at home? Even if you buy luxury beans, it still works out to be far cheaper than the coffee shop.
Ok, time to start today’s exercise. You’ll need your weekly grocery bill, three different color pens and a calculator unless you’re a mental math whiz. Ready? Let’s get started.
- Lay your grocery bill out on the table.
- Take your darkest pen and cross off all the things that you know are unnecessary. Decide instantly. If you’re not sure, leave it unmarked. We can review those later. Be careful not to cover up the prices of the items. We’ll need those later.
- With the other pen in hand, go through the list and circle items that are absolute necessities. Just so we’re clear, by necessities, I mean “the household will cease to exist and I am likely to actually die without these” not “I feel insecure or uncomfortable if I don’t have these in my house. Besides, they were on sale.” Again, go quickly and use your gut. Any unsures will be dealt with in the next step.
- Get out your unnecessary pen again and quickly go through the not-sures one more time to see if you can eliminate anything else. The more you view things as want or need, the easier it is to make a quick decision. It is a skill, just like riding a bike.
- Add up the total cost of the items marked necessary and divide that by the total cost of all the groceries you bought.
For example, if your bill was $147.56 and the absolutely necessary items totaled $98.99, then you should end up with 0.6775. Slide the decimal point two numbers to the right, do a little rounding and you end up with 68%. That is how much of the total was absolutely necessary.
Think of how much extra money you would have if you reduced expenses in just this one area. Instead of spending $7673.12 per year on groceries, you could reduce that to a very respectable $5217.72. That’s a difference of $2445.40! Depending on where you live, that could be two months of mortgage payments!!
At this rate, you could take your whole family away on vacation or pay down your mortgage faster or get on top of your credit cards.
Apply this process to other areas of your budget like entertainment, clothing etc and see what you can afford to do without. You’ll probably find that after the initial adjustment period, you won’t even miss these items.
Remember to tune in tomorrow for the third installment in this series, which is all about giving yourself a cushion.
