Expenses
A simple financial principle is that to have more money you can do one of two things:
(a) Increase your income; or
(b) Reduce your expenses.
Usually in business and your personal life the easiest is to reduce your expenses.
If you want to have more money for investing, or reducing debt, or giving away, you should look at your monthly spending and see what expenses you can cut out. If you haven’t done this for a long time a good rule of thumb is a 10% reduction in expenses, or 20% if you live a lavish life.
Here are some examples of ways to cut your expenses:
• Do not incur any new instalment purchases.
• Do some research on your mortgage interest rate. Many people simply get a mortgage and then forget about it. Are you able to refinance at a lower rate? Do you have the option to take a lower fixed rate? Could you change banks to get a lower rate?
• Pay off any credit cards or instalment plan purchases. The interest rates on these are far higher than either your home loan rate or on a personal loan from your bank. You are better off taking a new loan from your bank at a much lower rate and paying credit cards and instalment debt off immediately. Of course you then have to be disciplined not to ever spend more than you have, so that you can pay your credit card bill in full every month. If this is likely to be a problem, request that your credit card provider reduce your limit. Or simply cut up your credit cards.
• Terminate monthly subscriptions where you are not getting great value. Gym memberships and magazine subscriptions are often money wasted.
• Eating out is usually 3-5 times more expensive than eating in. Consider this as an area for cutting your monthly expenses.
• Check your travel and entertainment budget. Do you really need to travel and have a night’s accommodation for that concert or sports game?
• How much do you spend on Cable TV? Perhaps after reading the chapter on TV you can make a big saving here.
• How much do you spend on your annual vacation? Could you halve the cost and invest the difference?
• How much do you spend on coffee and snacks? Two coffees a day at $4 each is $2,920 per year! Invest that $2,920 for 20 years at 7.5% and you will have over $135,000!You might be thinking that cutting some of these will curtail your current lifestyle. In the short term you are correct. But reducing your monthly expenses by 10-20% will make a huge difference over time. Too often our expenses are extravagant and frivolous. If you can cut these out and apply the money to reducing debt or making investments, in five years time you will be reaping huge dividends that will literally enable you to take your lifestyle to a whole new level.
For example if your expenses are $50,000 per year and you can cut this by 20%, you get an additional $10,000 per year. If you use this $10,000 per year to reduce debt or invest at 7.5% p.a. in five years you will have over $60,000 in additional funds. Over a 20 year period it would be over $460,000. You can see how simply cutting your expenses can radically improve your lifestyle over time.
Once again it comes down to living within your means and not having a lifestyle your wallet cannot keep up with.
Action Step 4:
Systematically examine your monthly expenses. Go through your bank statements and credit card bills. Try to cut your expenses by 20%.
Common Traps
Advertisers tell us to buy the latest, the biggest and the fastest. We have to resist the urge to “keep up with the Joneses”. Homeowners are often guilty of this. Some people buy bigger and bigger houses in better locations and therefore increase the size of their mortgages. This increases financial stress and requires people to work harder or longer. Sometimes, this forces both parents in a family to work even when they don’t want to.
Another trap is using the equity in your house to buy bigger cars or toys such as boats. Once again you are buying depreciating assets and paying interest on the additional borrowings. This can add to financial stress and the extra interest payments drain your cash-flow. But if you are prudent there will come a time when you have so much home equity and a large disposable income that these luxuries are affordable and don’t put financial stress on you.
My advice is:
1. Never rely on overtime/bonuses/commissions to fund interest payments on luxury purchases. When hard times hit the economy you will be left high and dry.
2. Ensure you do an accurate budget before buying luxury items. You must have a lot of spare disposable income.
3. Don’t buy expensive toys “on the house” unless the equity in your house is more than $500,000. You might be able to afford it now, but if things get tight or a recession hits you don’t want to have to sell a $50,000 boat at fire-sale prices when no-one is buying.