Maybe you’re tired of money being tight, or maybe you’ve decided you’d like to grow your savings. No matter the reason, you’re ready to trim the financial fat.
Getting your finances in good working order starts with a budget. If you haven’t yet, this is the time to make a budget that works for you so you can analyze your spending habits. Once you have a good idea of what your expenses look like, you can make informed decisions about how you want to cut back on your expenses.
Let’s break it down
There are four key terms to remember when it comes to identifying expenses:
- Needs (Non-discretionary)
- Wants (Discretionary)
- Fixed cost
- Variable cost
Needs are expenses you must have to survive. These costs include utilities, groceries, mortgage or rent.
On the opposite end are your wants, which are things you can live without, but that make life more enjoyable. Examples are eating out, streaming TV subscriptions, and vacations.
Fixed costs refer to your ongoing expenses that are always the same amount, such as your mortgage, subscription fees and car payments.
And lastly, there are variable costs. These fluctuate in amount. Variable costs include expenses like groceries, entertainment and utilities.
Expenses can be either a need or a want, but they can’t be both. In the same way, expenses can be fixed or variable, but they can’t be both. So you can have an expense that’s a need with a fixed cost or variable cost and you can have an expense that’s a want with either a fixed or variable cost. See the diagram below.
Let’s get to trimming
Step 1: Categorize your expenses
Categorize all of your expenses as either wants or needs. Once you’ve done that, determine which items are variable costs and which are fixed costs. This gives you a good picture of your finances so you can figure out where to cut back on costs.
Step 2: Assess all of your wants.
This is where you’re going to find the most obvious opportunities to lower spending.
You don’t need to cut out all of your wants – that’s not realistic and you need a budget that you’ll stick with. Instead, decide between the expenses that can be lowered and the ones that can be cut out altogether.
For instance, instead of eating out multiple times a week, pare it down to once a week. If you eat out four times a week and average around $10 per meal, it costs you over $2,000 a year. Cut that back to once a week and you’ll slash that amount to $520 – saving you about $1,500 a year.
Finding small, yet consistent ways to save, reaps big rewards for your budget.
Step 3: Assess your needs with a variable cost.
It’s typically easier to save on expenses with a variable cost as opposed expenses with a fixed amount because you have some decision in how you spend.
An example is your utility costs. Utilities are necessary, but you have some control over how much you use, which determines how much you spend. Keep costs down by unplugging appliances that use energy while not in use, always turning off lights as you leave a room, and by keeping your thermostat in check.
These are essential expenses you can’t remove, but you do have control in reducing them.
Step 4: Assess your needs with a fixed costs.
Expenses in this category are the most difficult to lower. That’s because these are necessary costs that you have little control over.
These expenses include things like housing or car payments. You may find that your budget is in a good place after you’ve gone through your wants and your needs with variable costs. But if you still need to cut costs after giving the previous categories a thorough assessment, it’s time to make some larger life changes.
You can’t change your current housing cost, that amount is fixed. But you do have control in that you can downsize or find a roommate. The same principle applies to your vehicle. You can’t change your car payment amount, but you can sell your car and get something less expensive that allows you to accomplish your financial goals.
It can be challenging to take steps to lower your expenses with a fixed cost, but it’s possible and well worth it.
Final Takeaway
Cutting expenses is not easy. It’s hard to tell ourselves “no” to the things we’re comfortable having. But in taking these steps, you’re saying “yes” to a secure financial future for yourself. Many of these expenses you cut now are only temporary to help you reach your goal. Once you’ve achieved whatever you set out to do, you can resume some of your previous spending habits. But you may find you don’t want or need to because you’ve created a lot of healthy new spending and saving habits for yourself.
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