How to save BIG

by Xin Lu on 18 June 2009 13 comments
Photo: Big Money

A friend recently told me that someone she knows is so cheap that he would not let her use paper towels at his place.  Yet at the same time he complains about not having enough money and lives in a very expensive apartment and drives a brand new car.  I also know some similar folks who seem to be tightfisted about everything except for one or two big expenses in their lives.  This is not necessarily a bad thing, but perhaps it is more efficient to save on that big expense instead of clawing onto paper towels.

First, I think everyone should be aware what they spend the most money on each month.  This can be done by tracking your expenses for one month and ranking your expenses by amount.  Then you should go through the list from the top and try to reduce the largest expense first.  For most people the biggest monthly expense is probably housing, and that could be cut in many ways.  If you have a mortgage it is possible to refinance to a lower rate, or rent out a part of your home.  If you are renting it is possible to negotiate a rent reduction or simply move to a cheaper place.  Many people who refinanced their mortgages recently saved hundreds of dollars a month, and that is worth a lot of paper towels.

Another common large expense is transportation.  If you have an automobile you may have to pay a car loan, gas, tolls, and insurance fees.  It is possible to cut these expenses by trading into a cheaper car, negotiating your insurance fees, and driving less.  Next there are expenses such as food or credit card debt, and these areas can also be tackled as a group to get the most savings.

An important point to remember is that you should try to tackle your recurring expenses such as subscriptions and rent first because reducing these costs once will save you money every month.  For example, if you clip a coupon to save $1 on a certain item you would need to clip that coupon 12 times to save $12, but if you negotiated your credit card rate down 1% you would be reaping that benefit with every billing cycle and you could pay off your debt faster.    You save more on recurring expenses by doing the work just once.                                                                                                                                                              

I am definitely not discounting the fact that small savings such as 50 cent off coupons can add up to a big amount over time, but by tackling your largest recurring expenses first you will get the most savings for the  amount of time you put in.  Saving big on just one area of your life could give you a lot of breathing room in everything else.

What is your biggest expense?  Have you tried to reduce it?
 

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Guest's picture

A nice post and well put. I totally agree with you in dealing with the biggest debts first.

Guest's picture
Sarah

We moved and bought a house in a small city for less than a lot of people spend on a car. It takes a whole lot of taxi rides to add up to the price of buying, maintaining, repairing and fueling a car, so we never bought one.

Cutting back on the lattes is a good step in the right direction towards only spending money on what you really value, but it's hard to retire on the money you save there alone.

Leaving Toronto for the middle of nowhere and buying only a house we could afford in cash was the best financial decision we ever made. It was instrumental in creating financial freedom.

Philip Brewer's picture

It's certainly true that the big expense are where the money is.  Saving 10% off your rent is likely to save you a lot more money than saving 50% off your fitness center membership, lawn care service, or subscription to the local paper.

On the other hand, spending your money where it gives you the most value has always been my central message.  If, after careful consideration, you decide that a new $30,000 car every two years is the way to maximize your satisfaction, go for it.  (Personally, I'd rather have the extra $439,000 I'd end up with if I buy just one $10,000 car and make it last 20 years.  But that's just me.)

Two other points:

1) Most people's biggest expense is actually taxes.  People forget that--it's hard to cut your taxes without cutting your income, and most people just automatically figure their budget in after-tax dollars.  But it's worth remembering that taxes are (for most people) actually more money than rent or the mortgage.  For one thing, it makes a big difference if you're trying to figure out if you can live off less money--the drop in the tax expense provides a much bigger cushion than you'd imagine if your income drops.

2) It's a mistake to think of debt repayment as an expense.  Properly speaking, only the interest is a current expense.  The principle payment is an internal transfer, no different from moving the money from a checking account to a savings account.  I talked about that in an article a while back called Debt repayment is not an expense.

Guest's picture
Joe

I agree with Philip Brewer.

Remember, we own our money, not the other way around. The number one priority people should have is to live a comfortable and fulfilling life, not saving money for the sake of saving money. The reason we save is to be able to afford to live better. If a nice car and a nice home are important to me, I shouldn't be judged on that preference.

Xin Lu's picture
Xin Lu

I agree that there is nothing wrong with having a nice home and nice car, but if the cost of those things are giving you stress then there needs to be some adjustment.  It's all about striking a balance, and I don't think it is worthwhile for someone to eat noodles everyday and skimping on toilet paper just to afford a very expensive car that he or she cannot comfortably afford, but I understand everyone's preference is different. 

Also another point is that saving strategies such as renegotiating your rent or refinancing your mortgage do not reduce your living standards at all.  You would still be in your home, but it is just a little cheaper. 

Guest's picture

Rent is my largest expense. It increased when I moved out of my former roommate's house. However, the additional cost of $225 is worth it to live on my own. Although I live in an area with a fairly high cost of living, my apartment is very reasonable. It's only about 2 miles away from my job, so I take the bus to work which saves me money on gas and car insurance. Reducing the size of my carbon footprint is a pretty cool bonus too.

"Fixed" expenses must be carefully managed. They're often a hassle to reduce. You can refinance your car if you owe less than it's worth. How many people aren't underwater on their vehicle? Should your landlord refuse to lower your rent, you'll have to move in order to save money. How annoying is that?

It's also easy to stash away savings when your fixed expenses are relatively low. If you want to save up for a down payment on a house or to replace your living room furniture, you just cut back on [fill in vice here].

You're absolutely right in that people should focus on the expenses that are draining their bank accounts. But I have to admit, I scrimp on the paper towels as well.

Guest's picture
Justin

Interesting article. Thanks for sharing.

Guest's picture
martha in mobile

Buying less house than you can afford (unthinkable just a few years back) is a great way to save money and provide yourself some freedom. This, of course, may not be possible (or may even be dangerous) in expensive housing markets. My husband and I bought a house that we could afford on one salary, if necessary. When my child entered middle school and we all thought it would be best if one parent was at home with her, I was able to quit my day job without being overly concerned (I freelance a bit, and plan to return to the daily grind when she is in high school). The only downside is that my friends (who have much bigger, nicer houses) are jealous.

Guest's picture
Debbie M

I have definitely benefited greatly by keeping some of my bigger expenses much lower than average.

(Taxes are not one of them. I'd rather have a high income than my mediocre income, though not enough to work at a high-hour or high-stress job. I do keep my donation receipts and itemize my deductions and occasionally save taxes by buying online or on tax-free holidays, but those aren't big savings.)

My biggest savings are on housing, which eats only 21% of my budget. My main strategy is to always have a housemate. I've never had a bad one (destroying my stuff, not paying rent). I spend more time at home with my favorites, less with my less favorites, but mostly I love having some handy socialization that doesn't require making an appointment.

Currently I also live in a house that cost me only 60% of the median house price when I bought it. I gave up square footage and live in a marginal neighborhood, but the house is well built and in a convenient location. I got a fixed mortgage, and refinanced to a 15-year fixed mortgage. I try to maintain the house before small problems become expensive problems. It is not cheaper than an apartment now, but it will be in four years when it's paid off and I have only taxes, insurance and repairs to pay for.

I could save more money by living on the street, living out of a car, or living in a trailer, but I have a lot of stuff and space-consuming hobbies, so I'm happy with my current compromise except that actually I want to spend more on a renovation to get a real laundry room, a dishwasher, a walk-in closet, and covered off-street parking (I'm currently saving an additional 6% of my income toward that). I could save more by marrying this housemate and making him pay for half the repairs, too, but there are more important issues to resolve first.

I also spend less than the average for my area (where virtually everyone has a car) on transportation (9%). I pay cash for reliable low-mileage models ten years old and keep them ten years or so. I don't drive them much (free bus to work). I don't buy collision insurance--if I crash my car and it's my fault, I'll just have to eat it! I could do without a car (and did for four years), but I really love the freedom, especially now that very few of my friends live on a busline, and I love that I can lend my car to others when theirs is in the shop (I regularly lend to both my boyfriend and my sister). I am happy with this compromise.

And I spend much less than others on clothing (by shopping mostly at thrift stores), movies (using mostly Netflix), books (using mostly the library and checking addall.com for the rest), and make-up (I wear it only a few times a year). Oh, and glasses (online sellers! woo hoo!)

Also, I finally paid off my student loans and don't have credit card debt, so I pay much less consumer credit interest than others (0% of my income).

I also have no dependents and am very lucky to be healthy, collect very few injuries, and like my reasonably priced location just fine (I haven't fallen in love with New York, Boston, or even San Francisco partly because they're too cold!).

These savings allow me to spend much more than average in other categories: retirement savings (20%), charity (10%), and what I call "long-term fun" (8%) - stuff I have to save up for, usually vacations, sometimes electronics, furniture, or this year, a really big baby shower gift.

Guest's picture
Jodi

Love this advise - It's helpful to priortize savings opportunities. My home is my single, largest expenditure and while I'm not willing to give up my home (yet), I found a few web sites that help reduce home related expenses - my favortie is whitefence.com. It helped me save money on my internet and phone by bundling - I had these services through seperate companies. You can compare other services too like cable, satellite TV, and electricity. A couple of other sites that I have found helpful are mint.com for budgeting and billshrink - I recently renewed my cell service and checked here to make sure I was getting the best deal.

Guest's picture
HollyP

Sorry, but this is too basic. Where's the advice for those of us who've purchased less home than we could afford, who have paid cash for our car, and forgo magazine subscriptions and Netflix?

Guest's picture

I completely agree with your point. Tackling the large expenses first can help a great deal in saving up big for the future. People tend to get frugal on small things but forget about the large recurring expenses that pile on huge amounts of debt which becomes difficult to handle over time.

Guest's picture

Thanks for sharing such great post, according to me Staying in debts and spending huge amounts is not a wise decision. You should always keep note on your budget and spend accordingly. For more details on monthly expenses refer http://www.prime-targeting.com/the-guide-to-spend-less-reduce-monthly-ex...