People often ask, “What’s the best expense cutting method?” While it would seem that any cuts, no matter how small, are good (and they are, particularly in times of real financial stress when every little bit helps), there is a method that makes the most impact in the shortest period of time, and with the least amount of effort. What’s not to love about that?
The thing about cutting expenses is that there are some things that seem like a good idea (and may be), but which don’t yield the results you need. Take the oft repeated “Cut your daily latte,” advice. Yes, cutting out that expense is helpful. That’s a few extra bucks a day in your pocket. But if other expenses are sucking all your money away, that few dollars isn’t going to help much. It’s the same with things like cutting coupons or buying gas at an out of the way station to save a few cents per gallon. The actions are helpful, but not tremendously.
So what is the best expense cutting method? Highest to lowest, and most return for least effort. Why does this work? Because an easy cut made to a high expense is likely to save you more in the long run than a small cut that either takes a lot of effort or doesn’t make much difference. Saving $100 on rent every month is a bigger deal than saving $10 per month by clipping coupons. (Not that there’s anything wrong with small cuts. They’re great and anything that keeps spending in check is wonderful. It’s just that when you’re drowning, you need help fast.)
First, you’ll need to order your expense categories from highest to lowest. What are you spending the most money on each month or year? For most people, that’s probably rent/mortgage, followed by utilities, maybe debt repayment, groceries, insurance, etc. An expense tracking app or spreadsheet makes it very easy to sort by expense category. If you don’t have that, sit down with your statements and pen and paper and figure out where the money goes every month.
Once you know which items are costing you the most each month/year, now work on cutting them from highest to lowest. If mortgage/rent is the biggest expense, think perhaps about downsizing, refinancing, negotiating a lower rent in exchange for a longer lease or doing some work around the property, taking in a roommate, or moving to a different place (or city, if you need to get to a lower cost of living location). While not easy, these types of changes can save you some serious money. If you can make a significant cut here, you’ll have less work to do as you move down your categories.
Other things can be easily handled with a phone call or online. Insurance? Shop your policies and coverages or, if possible, see about a higher deductible. Phone/cable/internet? Call and ask about retention discounts, bundles that might save you money, or dropping some services or speed.
Some items require more effort on your part, but not too much. Utilities? If your area offers a choice of providers, shop around. Call and ask about time of day discounts and change your use pattern accordingly. See if the electric company offers discounts if you let them control your heat/AC during peak hours. Turn your thermostat up/down accordingly. Use less water. Use energy efficient lighting. Little efforts here can add up to big savings.
Are you paying a ton for debt repayment? Open a zero interest credit card and transfer your balance to that card and then work to aggressively pay it off. See if you can refinance your loans. If you have old debt that’s gone to collections, see if you can negotiate a lower payoff amount. Medical debt? See if the hospital/doctor will take a lower amount, or if they are willing to take a lower amount per month as long as you’re paying them something.
Vehicles? Can you use public transit and/or drop down to a one car household? Find ways to drive less? Trade in your gas guzzler for a more efficient car? Any of these will make a bigger difference than saving a few pennies on gas.
Entertainment/hobbies/kid’s activities? There’s almost always a free or low cost alternative, like using the library for DVD’s or books, staycations instead of traveling, buying used gear instead of new, free streaming or antenna instead of cable, local rec leagues instead of pricey travel teams, pot luck dinners instead of nights at the club, and so on. Worst case, you go cold turkey and spend nothing. If you have a big category like entertainment or travel and it’s something that is completely optional, the biggest cut is simply not to spend on it for a while.
There may be some categories for which you can make two cost cutting passes. Take food, for example. You can make big changes to the category by changing what you eat (less meat, using leftovers, less convenience food, etc.), where you shop, or by not eating out. But you can also go back and make smaller cuts by using coupons or switching to generic to add even more savings. Make the big cuts first and then once you have those under control, go back and see if smaller actions save enough to be worth the effort.
See where I’m going with this? The goal is to make the biggest difference as quickly as possible. You do that by taking big chunks out of your biggest expenses. Only once you’ve made the big cuts should you turn your attention to the lower value cuts. You may discover that you can cut so much out of the big things that you don’t need to skip your latte or clip coupons, unless you just want to.
I’m not going to argue that all of the big cuts on big expenses are easy, or that they may not require some sacrifice on your part. Things like using public transport, taking in a roommate, or dropping entertainment aren’t particularly fun or easy. But if you need to cut expenses quickly in order to get or keep your head above water, they make a far bigger difference in less time than shaving a few dollars off here and there.
Eventually, you’ll probably find that saving money simply becomes a habit and you become adept at managing both small and large expenses without even thinking about it. You won’t need to do this top down activity as often, if at all. I shop insurance every time the renewal bill comes. I’ve done so much work on my home over time that my electric bill is optimized. I still make sure I’m careful with usage, though. I’m conscious of how every day expenses add up, even from things like using two-sided printing to save paper and, yes, skipping that latte. I’m able to quickly tell when a savings idea isn’t worth either the effort or the impact to my life. But I got here by making the big cuts first, and turning them into habits.