Budgeting, Part 2: Reducing Expenses
Eileen St. Pierre, The Everyday Financial Planner
Let’s face it. We all could use a little help improving our cash flow. In my column last week, Budgeting, Part 1: Increasing Your Take Home Pay, I went through an example of how correctly listing your withholding allowances on your W-4 can improve your cash flow. This week, I’ll focus on reducing expenses. Granted it’s not exciting (unless you really get into the whole coupon clipping thing), but it can really pay off very quickly.
Focus first on cutting variable expenses.
Variable expenses are those costs that fluctuate every month, depending on your usage. Here is where you will get results the quickest. Food is probably the largest variable expense for most families.
- If you can lower your grocery bill by $10 a week, that’s $480 a year saved.
- If you can save $50 a week on one dinner out, that’s $2,400 a year saved.
- Take advantage of low gas prices – not by driving more – but by combining errand trips. If you can save two gas fill-ups at $25 each per month, that’s $600 a year saved.
- One of my biggest pet peeves is when people leave lights and other things on in a room after they’ve left. Shut them off and save some money on your utility bill!
Next focus on lowering fixed monthly expenses.
Fixed expenses make budgeting easier because you know how much you are going to pay each month. On the downside, they can be hard to reduce in a timely manner. Some require you to re-finance a loan (like your mortgage). There can be paperwork or the hassle of visiting the company (like your cable provider or insurance agent) and reviewing your plans. But it may be worth the extra work on your part.
As a financial counselor, one of the biggest expenses I see clients overpaying for is car insurance. If you finance a vehicle, the lender is going to require you to have a very low deductible like $250 to protect their collateral –they want to make sure your car is fixed properly. But as the car ages and you pay off the loan, you do not need such a low deductible. Yes, increasing it to $500 or $1000 will increase your out-of-pocket costs if you have an accident, but it will also reduce your premium quite a bit.
- As the car ages, think about whether it makes sense to reduce the amount of collision coverage. If your car is only worth $1,500 if it is totaled, is collision coverage necessary?
- Also look into bundling insurance policies with the same provider to get a discount.
Improve your credit score.
How does improving your credit score affect your budget? The obvious answer is that it lowers the interest rate you are charged on a loan. Of course, to reap the benefits of an improved credit score you will probably need to refinance your loans. The less obvious answer is that it also lowers your insurance premiums and utility deposits, freeing up money for your other bills. Why? People who manage their money well are more likely to take better care of their property.
Stay tuned next week for the final column Budgeting, Part 3: Paying Down Debt. Visit my Basic Financial Management page for more information.