If you are like many Americans, you are struggling to get a handle on your monthly expenses. Many of you might even be living paycheck to paycheck. I’ve talked before about if you want to become wealthy, you need to focus on both sides of the wealth equation. Today, I am going to focus on the savings side of this equation. More specifically, I am going to talk about how to cut monthly expenses from your budget so that you can save a ton of money each month.
In order to cut our monthly expenses the most, we are going to take a top down approach to cutting our monthly expenses. In other words, we are going to start with the big and work our way down to the smaller things that cost us money each month. So grab a pen and paper and get ready to take some notes.
Cutting Monthly Expenses: The Big Expenses
Most of us have just a few large expenses in our monthly budget. These include our mortgage/rent, insurance, and taxes. We focus on these things first since taking the time to save money here will pay off in a much larger way. After all, there is a lot more money to save on your insurance premium or your monthly mortgage payment than there is on your coffee habit, unless of course you drink 20 cups a day.
Cutting monthly expenses when it comes to your mortgage isn’t too difficult of a task. One common step is to refinance for a lower rate than you are currently paying. But, there are traps with refinancing. You could pay an absurd amount in fees, negating the interest savings or you could even get tricked into extending the length of the loan, causing you to spend more money in the long run.
Make certain you understand your goal when it comes to refinancing before talking with anyone. Do you want to save on interest over the course of the loan or are you more interested in cutting the monthly payment so you can free up some cash? Once you answer this question, then you will be able to sit down with someone and figure out the best route for your situation.
With interest rates still relatively low, you could save a few hundred dollars per month by refinancing. You just have to be smart about the refinance process and take your time to make sure you understand everything. If you are in the market for a refinance, here is a current listing of rates:
Now, what if it turns out that refinancing isn’t an option for you? Are you stuck with your current payment? Yes and no. I wrote a post that offers a handful of little known ways to pay off your mortgage fast. Among the options are a fake refinance and using extra cash to knock out your mortgage quickly. Many of these options could open the door for a better refinancing situation or even paying off your mortgage entirely, freeing up a ton of money.
When it comes to rent, there isn’t much you can do now in terms of cutting your monthly expenses associated with the cost. The only things you can do are to start the process of looking for another place to live that is cheaper or negotiate with your current landlord. Some might be leery of trying to negotiate with their landlord, but the worst that can happen is they say no.
To improve your chances of a yes, be sure to highlight all of the great things you bring to the table: on time rent, no complaints, keep the unit well maintained, etc. At the end of the day some landlords would rather have a great tenant that is paying a little less than market rate than have a horrible tenant that doesn’t pay at all. You’ll never know which landlord you have unless you ask.
For me, I didn’t raise the rent on my tenant because she was so amazing. I never had any issues from her and the rent was always on time. I would rather forego an extra $25 a month ($300 a year) and have zero stress than have an extra $300 and have some level of stress.
Insurance is another place where cutting monthly expenses will see a nice amount of savings. In fact, I would argue that saving money on insurance is 100 times easier than with your mortgage. Most companies offer free quotes on car insurance. Just spend 10 minutes filling out the information and you’ll have a free, no obligation quote.
You should be shopping around and getting car and homeowners insurance quotes every other year at a minimum. Just because you are a great customer doesn’t mean you are getting a great rate. It all has to do with how the company is doing overall. Also, new studies have found that people who stay with the same insurance company actually pay more over time than they should. These people basically pay for the others who shop around and get offered lower rates.
I used to use an insurance company that I thought was offering me the best price. Then one year, my premiums jumped 10% without warning. I did nothing to cause this spike either. It turned out that the insurance company suffered huge losses after a major hurricane and needed to replenish its balance sheet. This meant rate increases for everyone.
I refused to pay more, so I shopped around and found a great insurance company that ended up charging me $250 less per year. I stayed with them for 2 years and then shopped around and found another company that charged me $150 less.
The bottom line is that you need to shop around for insurance coverage. It takes 10 minutes and is completely free. By not doing it, you could potentially be paying hundreds more each year than you should be. (You should also try to bundle your car and home coverage too, which will help lower your bill.)
And it doesn’t end with car insurance either. If your employer doesn’t offer you health insurance and you are buying your own coverage, you need to shop around for a great price. You can easily get a free health insurance quote as well. Again, it takes 10 minutes and there is no obligation to buy.
In either case, just knowing that you aren’t being overcharged for coverage should be reason enough to get a free quote.
Most of us don’t think about cutting taxes when it comes to trying to reign in our monthly expenses. But taxes are a big deal. There are a handful of simple ways you can reduce your taxes and save money in the process:
- Contribute To Your 401k: The money you contribute to your 401k comes out of your paycheck pre-tax. This means that you are paying less money in taxes on the amount you actually have deposited into your checking account. In other words, if you get paid $1,000 and don’t make any 401k contribution, you will pay $150 in taxes (assuming you are in the 15% tax bracket and other factors aren’t taken into account). But if you contribute $100 to your 401k, you will only be taxed on the remaining $900, which is $135 (15% x $900). You just saved yourself $15 in taxes. Over the course of a year, this turns into potentially thousands of dollars you can save.
- Put Money Into An HSA or FSA: These are accounts you put money into to help pay for medical expenses. The main difference between the two is that with an FSA, you have to use the money you save in the account during the year. With an HSA, you don’t have to do this. You can read this article that breaks the two out really well. The advantage of saving money here is the same as the 401k option above – your savings are pre-tax, helping you to pay less in taxes.
- Change Your Withholding: If you get a large refund each year, look into changing your withholdings. Most don’t do this because they are scared that they will not get a refund at tax time and have to pay in. The reality is that if you are getting a large refund (over $3,000) and have no other life changing events, you can easily change your withholdings and get a fatter paycheck and still get a refund (be it a small one) each year. You can use this free tool from the IRS to help you do the math.
- Invest Wisely: Make sure you have a tax efficient strategy when it comes to investing your money. By simply placing certain assets in your retirement accounts and others in your taxable account, you can save yourself a good amount in taxes.
Cutting Monthly Expenses: The Small
Now that we have covered the big monthly expenses, it’s time to focus on cutting monthly expenses that are small in size. There are thousands of small expenses that everyone has. Because of this, I am not going to cover all of the various ways you can cut your monthly expenses on small things. I am only going to highlight a few of the more common monthly expenses. Hopefully this is spark a curiosity in you to tackle other small expenses as well.
Cable TV is a huge expense for most of us. I previously wrote about how Comcast is no longer offering promotions to existing customers, but that seems to have changed again. I recently called and was able to get our promotion extended for another 12 months. There is no reason why you shouldn’t take 10 minutes and try to get a lower monthly cable bill. Saving just $10 per month works out to over $100 per year, and many times you can easily get that. With a little more effort, you might even be able to score larger monthly savings.
Just one note here, don’t fall for the “more channels, same price” trick. You aren’t accomplishing your goal of cutting month expenses. You are just getting more channels. And when the deal ends (and it will) you will pass out when you get an updated bill now charging you for all of those “free” channels that got added.
I am lucky that I live in a state that offers electricity deregulation. This means that I can choose my electric distributor and potentially save money. If you don’t live in a state that offers this, there are still many options for cutting monthly expenses on electricity. All you have to do is pay more attention. As crazy as it seems, turning off the lights when you aren’t in the room works. Here are a few more electricity saving tips:
- Spend the money upfront on CFL bulbs. They do cost more, but they cost less to operate and last a lot longer. They even have them now with different light so you can find a brightness that meets your satisfaction.
- Buy a Programmable Thermostat. We use ours and have it set up so that the house isn’t heated or cooled when we aren’t around. We’ve seen a nice drop in our electric bill as a result. Here is the model we use. In addition, close doors/vents in rooms you rarely use. There is no point in heating or cooling these spaces.
- Buy ceiling fans. You will have to pay upfront to get them and install them, but they save a ton of money. We used to keep our house 5 degrees cooler in the summer before ceiling fans. Now with them, we have to keep the house warmer because of the cool air the fans blow on us. We even use them in the winter (there is a switch to reverse the direction) so that it pulls down the warm air that rises.
- Unplug Electronics. Many electronics still draw power when turned off. This includes your phone and tablet chargers as well as flat screen TVs. Pull the plug on these when not in use and watch your electric bill drop. If you aren’t sure which electronics are secretly sucking money from your wallet, spend $20 on a Kill A Watt. It will pay for itself almost immediately.
Groceries cost a lot. The average family of four spends close to $900 per month on groceries. This doesn’t even factor in any meals that they eat out either. If you find your grocery bill to be too high, what can you do to save some money?
The first thing you should do is shop smarter. If you have multiple grocery stores in your area, find the one that offers the best prices. Then, learn to buy things that are on sale. Learn to meal plan around what is on sale. Also, read my post about how my sister feeds her family for $35 per week.
To curb eating out habits, cook ahead of time. For my wife and I, we would get tired/lazy by the end of the week and not feel like cooking. This lead us to eat out a lot on Thursdays and Fridays. Now we take some time on Sunday and cook meals for the week. All we have to do is just reheat them and we have dinner ready in 5 minutes.
In addition to this, learn to make some simple meals that only take 20 minutes to make. There are thousands out there, just take a few minutes to search around.
There are some simple things you can do to increase your fuel mileage. First, learn to drive slower. This isn’t to say drive like an old man out for a Sunday drive. Just slow down a little bit. The faster you go, the more fuel you use. Additionally, learn how to accelerate and stop. When you punch the gas at a green light or slam on the brakes at a red light, you are wasting fuel. Accelerate slowly and anticipate red lights and stop signs by coasting to them.
Lastly, don’t make the costly mistake of buying a hybrid car just because you will spend less on gas. In many cases, hybrids aren’t worth the price. You are better off learning how to drive smarter in order to cut your monthly fuel bill.
Most people don’t get their money’s worth out of a gym. You don’t need to join a gym to be healthy and get in shape. You can do body-weight exercises or DVD programs like P90X or T25 right from your living room and save yourself the gym fee.
I wrote a post on alternatives to the gym that is a must read for anyone thinking twice about joining a gym. You can even do something as simple as buy an activity monitor. I have been wearing a Jawbone UP 24 for over 2 years now and love it. I am fairly active but was shocked at how little I move around during the day. It helps to get me out of my chair during the day and move.
Again, these were just a few of the small ways you can cut your monthly expenses. If you would like more ideas to cut your spending, I have an eBook, Spare Change, which lists over 150 ways to cut your monthly expenses and save money each month.
What To Do With Your Savings?
Now that you’ve taken action and actually reduced your monthly expenses, you are going to have to figure out what to do with the money you’ve saved. Here is a clue: spending it should not be an option! Below I list 4 ways for you to use your new found savings from cutting monthly expenses.
Pay Off Debt
If you have credit card, student loan, auto loan, or other types of personal debt, you should use the money you save by cutting monthly expenses to rid yourself of these debts. Doing so will free up more money for you to save every month.
Look at it this way: if you are paying $400 a month for an auto loan and pay another $250 a month a credit card, paying both of these off will free up an additional $650 each month. How great would it be to have that “extra” money?
For help with a payoff plan, read this post.
In addition to those debts, maybe you took many of the steps above to cut your monthly expenses but you couldn’t refinance your house because the debt to equity ratio is too high. You could use the money you are saving in other areas to accelerate the pay down of your mortgage so that you can qualify for a refinance and save even more money each month.
Build Emergency Fund
Having an emergency fund is essential when it comes to good finances. Most people recommend 3-6 months worth of living expenses in an emergency fund. I am on the more conservative side and think that you should have around 8 months in an emergency fund. Why do I say this? It’s hard to find a job and many that do find work are working lower paying jobs. Having an extra cushion in your emergency fund will take some of the stress out of your life.
The key to building wealth is through the stock market. In my how to be a stock market millionaire post, I laid out the steps for investment success. One of the main keys is to learn the basics about investing and to make sure you have a long-term outlook. If you can do these two things, you will be well on your way to making money in the stock market.
Once you do the above, check out my online broker comparison chart to figure out where you should invest. If you have any questions about it, don’t hesitate to ask. And if it still feels overwhelming, look into an automated investing option.
Once you have all of the above taken care of, you can then use the savings from cutting your monthly expenses to fund other savings goals you might have. This includes a new house, a dream vacation, etc.
The easiest way to save for these things is to automate your savings. It’s simple and very effective. There is even a great service out there that will do all of the work for you!
Overall, I want you to first attack the large monthly expenses you have since you can experience much larger savings from these as opposed to the smaller monthly expenses you have. Once you are finished with the large monthly expenses, then you can focus on knocking down the costs associated with the other small expenses you have. With the money you save, you should be ridding yourself of any debts you have first. This will free up even more money for you to save. From there, you can begin investing and saving the money for your future needs.
I am certain that if you take a few hours over the course of the month to save a little bit of money, that money saved will add up very quickly and you’ll be surprised at how much you can save. Remember, don’t look at cutting monthly expenses as going without or in a negative light, see this as a step towards allowing you the freedom to live a better life.
[Photo Credit: Tax Credits]