So the accountant recommends you cut your costs…what a surprise.
I’m sure you knew this was coming. No guide on wealth building would be complete without a section on reducing your expenses.
At all stages of life, I believe it is important to monitor your expenses.
After all, what gets measured, gets done.
Lowering your expenses has two amazing benefits for your journey towards financial freedom:
The lower your expenses, the earlier you can retire, as you will be accumulating savings faster; and
If you can keep your expenses at a lower level during your retirement, you won’t need as much invested to cover your living expenses. I.e. you only need $500,000 invested earning 4% to cover $20,000 of living expenses, versus needing $3million invested earning 4% a year to cover a $120,000 per year lifestyle.
When you monitor your expenses, you might find that you don’t earn enough to live your lifestyle. This can be a motivating way to try to increase your income.
Alternatively, you might find that you are spending needlessly and are able to cut back.
When monitoring your expenses, you’d be amazed at what you might find, and you wouldn’t be the only person that said they found expenses they didn’t even know they were paying for!
Monitoring can take place in a couple of ways.
For me, the easiest way is to review your credit card or bank statements at the end of the month. This will give you an indication of where your money is going.
When reviewing your expenses, keep in mind that no matter how small an expense is, if it’s not necessary, you should be cutting it from your life.
It’s not unusual to see some people paying for Foxtel, Stan, Netlix and Amazon Prime each month. That’s a lot of TV. Why not watch everything you want to watch on Foxtel for a month, then turn off the subscription and move over to Netflix?
So good is the technology at the moment that some banks will automatically categorise your expenses and determine where you are spending based on your narrations on your bank statements. This can be used to do the heavy lifting for you.
When you are monitoring your expenses, remember that no cost is off limits. No matter how small, if it’s not adding value to your life, you should remove it.
For each expense item, you should be asking yourself:
Does it add value to my life or is it necessary? If yes, it can stay, but always be on the look out for a more affordable product.
Can I find a cheaper product offering the same service? If yes, consider moving to that provider.
Are there other ways to receive the same product while paying less? An example here is if you love reading, consider utilising a library rather than purchasing books. This is better for your wallet and the environment as well.
Am I prepared to delay my financial independence by continuing to incur this expense? That’s a pretty heavy question, but the reality is, every time you make a purchase, you’re taking away money that could be used to reduce debt or invest. Remember, the opportunity cost of $1 spent today is significantly more if invested for the long-term instead.
21 money saving principles:
Delay big purchases by a week to make sure the desire is still there.
Mercilessly reduce costs that add no value to your life.
Turn the power off at the back of the wall.
Use the earth’s natural heat to dry your clothes instead of an electric dryer. Not only will you save money, your clothes will also last longer.
Where possible, walk or ride a bike instead of driving.
Live closer to work to reduce your commuting time. Live so close to work you can walk or ride a bike.
Be careful of subscriptions. The small amounts you pay per month don’t look like much, but they add up quickly. And of course, make sure you are actually using them!
Repair instead of replace.
Don’t pay to store your excess furniture and belongings.
If you’re not using it, sell it.
Don’t shop on an empty stomach (you’ll end up buying too much).
Buy in bulk where possible.
Eat out less. A lot less.
Use air-con sparingly. Anyway, the less you use it, the more you’ll acclimatise to the weather.
Take advantage of free activities.
Buy the cheapest car your ego can withstand.
Don’t buy bottled water. Seriously, please stop buying bottled water.
Buy used instead of new.
Luxury goods are called luxury for a reason. It should be a luxury to own these products, not the standard.
Be wary of sharing your own money with people that spend frivolously.
Some bills have the option of being paid off upfront or over 12 months. Assess whether the 12 month option is more expensive (usually it is) and pay upfront (or take the cheaper option) where you can.
Life is about balance. The idea is not to be a miser and never go outside just to save hoards of money.
Life is to be enjoyed. At the other end of the spectrum, if you’re constantly living off credit cards, there’s room for improvement.
Money control is a fundamental financial planning principle. It’s starts with the basics. Get your head around this, and you’ll be on the path to savings and financial independence in no time at all.
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