Lowering your expenses can seem tough at first. You think you live a normal lifestyle and don’t spend too lavishly, so how can you lower your expenses? Well you’re in the right place because we have a few ideas that might get your brain juices flowing and more money in your pocket!
In part 1 of this series we talked about why expenses are important. Now we’re going to cover a few things you can do to lower your expenses and allow you to save more. We’ll cover 5 different areas and suggest a few points for each. This is not meant to be a definitive list, and it’s also not all going to be relevant for you. Some things will work great for you, and others might be a complete flop. Nothing ventured, nothing gained. Give things a shot, even if you think they may not work. I see people making big savings all the time from things they never thought would work! The important concept to get from this is that there are always areas where money is leaking out of your hands and into the hands of others.
1. Aim for the big things
There are some big expenses in life that have such a disproportionate effect on your finances that cutting them a little can have a huge benefit. Always a good place to start.
Rent: If you are renting, ask for a rent reduction when your renewal comes up, or when a rent increase is proposed ask for it to stay the same. You might think this is unlikely to happen but landlords often don’t want the pain of having to change renters or risk having a vacancy even for a few months. If you are good tenants and ask for a smaller or neutral rent hike when it comes around, you might have better odds than you suspect. I’ve seen people offer to fix up little issues in rentals in exchange for different rent prices and get accepted just because the landlord doesn’t want to put in the effort.
Mortgage: If you own your own home, you know there are lots of fees, bills and costs to be paid. By re-mortgaging when rates are preferable, switching insurance providers and paying off slightly more when possible, you can save yourself tens of thousands of euro over a few short years. Nice!
Car: Cars are most people’s second largest expense. By spending less on a car in the first place, or avoiding the 2nd car you can typically save a few thousand upfront. This also has the added benefit of reducing payments as many will finance their car purchases. Buying a brand-new car is also not the best financial decision as the price can drop around 20% just driving it off the lot. Ouch. Depreciation is a major hidden cost of having a car. By looking at cars that are older than a year or 2, you can save a pile of cash as the price has reduced a lot and the car is basically the same quality.
Bills and recurring expenses: Bills like electricity, heating, internet and insurance are a constant part of your expenses. A great way of building in savings from these is to switch at the end of contracts and chase deals. Most providers are exactly the same in terms of service so it often is simply a price comparison. Some providers will guarantee discounts for bundling products (eg. Combining internet and phone provider). This can be a great way of savings 10-15% on your bills at times.
Mobile phone bills are another area to watch. It can often be a lot cheaper to buy your phone up front and just pay for a sim only setup rather than paying for a more expensive plan with the phone “included”.
Move to a less expensive area: The area you live in can subconsciously guide you into a particular lifestyle. The inherent social pressure to follow the cultural norms will lead you to do whatever the people around you do.
2. Aim for the little things
While a few big things can have a large effect on your spending, there are a thousand little things that cause money to leak away from you. These constantly drain your money little by little and it all adds up.
Sell some stuff, replace old lightbulbs with more efficient ones, discover actions to lower your energy bill, turn off electrical items when not using them or not in the house, lower your heating by 1 degree, get rid of any club memberships you’re not using, get rid of subscription TV or go to the lowest price package, stop magazine subscriptions, cook your own meals, bring lunch to work, buy generic or home-brand where possible, eat out less.
Ask for a discount, just do it! Ask if they have a student discount, they may not ask for evidence….and you didn’t say you were a student
Finding a few areas like this where you can save on recurring expenses can build up. These are often things that you don’t even care about. Bringing your lunch in to work could save you money, and you might be eating healthier. Try focus on things that have more than a monetary benefit and you get a double win.
3. Lower your transport expenses
Transport is mostly one of the large expenses for most people. It also has an impact on our health and the environment. With a few tweaks, you can get a double benefit with some lifestyle changes.
Although cars offer great freedom, they also make us lazy. By committing to walking to the shop when you only need a few things you can carry, you get more exercise and start the habit of driving less. If the shops are a bit too far to walk or you need too much to carry, get on your bike. Investing in a basket or bag mounter on your bike could save you a fortune in the long run, while you get fit.
Getting a bike can be one of the best lifestyle moves you make. A friend of mine sat in traffic in his car watching bikes fly past him in the bike lane, while he was commuting to his job for about a year before he tried cycling to work. It turns out his commute is the same time while cycling. He has saved thousands of euros in a few years of cycling and he gets more exercise than most people could motivate themselves into doing in a week.
Using public transport, getting a bike, walking and running more, and carpooling are all ways of improving your lifestyle in tandem with your finances. If you are driving your own car, ensuring the tyres are inflated properly and keeping it in good running order can increase efficiency.
4. Take free money!
There is free money out there for the taking. This isn’t a scam, it’s much more boring than that. There are tax credits and benefits available that are often not used to people not knowing where to look. Many employers offer employee benefits that are great, but when you’re in the door they don’t push them on you. Investigating the free money available to you can get you a high return with little effort, because it is available you just don’t know it. Check out my article on free money to get started with this.
Get an EHIC card. E.U. citizens can get free health cover travelling with the Union. It’s free to sign up and could save you a fortune if something happens and you need medical care while travelling in Europe.
5. Track your expenses
Once you start tracking expenses you’ll find ways to lower and remove unnecessary things and things you don’t value.
There is often a disconnect between how we think we are spending our money and how we actually are. Tracking your expenses, even if only for a month, can give insight into the reality of your savings that is hard to get just looking at bank statements.
There are plenty of ways you can lower your expenses. Focus on long term fixes and go for a few things at a time. As you start seeing savings, it’ll get easier to cut more areas and get better deals as you motivate yourself with your early progress.
Parable of the Monk and the Minister
Two close boyhood friends grow up and go their separate ways.
One becomes a humble monk, the other a rich and powerful minister to the king.
Years later they meet up again.
As they catch up, the minister (in his fine robes) takes pity on the thin, shabby monk.
Seeking to help, he says: “You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”
To which the monk replies: “If you could learn to live on rice and beans you wouldn’t have to cater to the king!”
As mentioned in our 2 years to 2X your Income post, income and spending are the 2 areas of your finances you can have most effect on. Whereas income is not solely dependent on you, your expenses are under your control. Taking control of your expenses can lead to improvement in every other area of your money. Controlling your expenses allows you build savings and savings are power. If you want to travel, take some time off work, buy a home, change jobs, whatever, having a chunk of cash saved gives you the power the follow your dreams.
The default for most people is to spend exactly what they earn. Some a little bit less, some a little more, but mostly spending is tightly linked to earnings. This default position is the main trap keeping people living at the same level for years on end. This is why people don’t have an emergency fund, savings, pensions, or even simply options to choose how they go about many aspects of their lives.
If you can break this ingrained idea you can break the mould. Spending does not have to be linked to earnings and if you want to improve your financial standing, it cannot be linked to it.
You need to separate and fully delink what you spend and what you earn so you are about to develop a surplus of funds to achieve your goals.
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” Charles Dickens.
As long as your expenses are lower than your earnings, you’re on the right track. If you don’t even have a minor surplus, you need to take measures to sort this out. Spending more than you earn is a quick path to misery as debt builds more debt and stress builds. Depending on the level of over-spending you may have to cut more viciously. If you are spending a small amount over your earnings, you might need to cut back on spending slightly and you’re okay again. However, if your spending is massively over your earnings, you should start tracking all of your expenses and start cutting things out like a maniac!
A handy tool for figuring out your level of financial badassity is too calculate your savings rate. This is how much you save as a percentage of your take home pay.
If you have €2,000 in take home pay and you save €500 you have a savings rate of 25%.
Savings rate is a great tool as it shows you what you’re keeping compared to your expenses. This is such an important concept because it is about your expenses and not your income. Try not to focus too much on the euro number amounts in the examples to follow as they’re just a guide to understand the concept. The reason you shouldn’t focus too much on the number amount is because some people will earn €20k per year and some will earn €120k per year. If you focus on the percentages, you know how you are doing compared to your own income. The more you can increase your savings rate, the better off you get as your expenses lower compared to your own income.
Sarah starts working after college and has a take home pay of €1,500 per month. Her spending is €1,400. She saves €100 a month (or 6.7%) and it will take her 14 months to save one month’s worth of expenses. She wants to save more so she budgets and cuts out some spending that’s not aligned with her values and lowers her spending to €1,000. She knows that she can’t lower her expenses anymore without lowering her quality of life so she pats herself on the back and continues at this level of spending. She saves €500 a month (or 33%) and will have one month’s worth of expenses every 2 months. This gives her 6 months of expenses at the end of the first year of increases savings. Not bad at all.
Here comes the real trick. When Sarah changes job into a higher-level position in another company she gets a raise that gives €2,500 per month after tax. As she’s learned the value of controlling her expenses she doesn’t automatically spend more. Sarah knows she is comfortable living on €1,000 per month and chooses to continue living the same lifestyle. She now saves €1,500 per month (150% of her monthly expenses) and knows that if she keeps working for another year while living like this she’ll have 18 months of expenses banked and then she could theoretically not work for 18 months and continue living at the same standard of living. With this amount of savings, she can stop working to travel for a few months and not be worried about money.
At some point most people will hit a spending floor where lowering expenses any further will lower their standard of living past the level they are comfortable with. This is the point you want to get to. Where you are living a lifestyle you enjoy and are comfortable with, but are still saving at a good rate. For some people this is 20% of their earnings, for others it may be 80%.
Just as most people will automatically spend what they earn, most will increase their spending anytime they increase their income.
By not increasing your spending with income, you give yourself increased room to raise your savings rate with ease. This is how you can simply delink your earnings from your spending.
There are different periods of your life where savings rate will differ. If you are savings for something like a house, wedding or a big trip you will of course increase your savings rate. If you have just had a child or lost your job, this will lower your savings rate. However, having your savings in place from easier times will give you the buffer and comfort level you need to take these tougher times in your stride. By lowering your expenses in general, you give yourself a level of badassity and confidence that most people won’t have.
Controlling your expenses is the best way to get your finances under your control as you are responsible for it.
Unlike your earnings, taxes, your field of work, the economy, and investment returns, you are in charge of your expenses. Once you get past the minimum level of comfort you need (which is probably a lot lower than you first think) all of your spending is up to you.
At some point you may choose to increase your spending, but it will be a choice. By starting from a position of low expenses you give yourself the freedom from money worries others will never have.
Check out part 2 of the spending series to learn 5 tips to lower your expenses.
Financial literacy leads to reduced stress, better decision making and the ability to plan to meet your personal goals.
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