If you desperately need to save money, reducing your monthly expenses makes sense. But sometimes, knowing exactly what to eliminate from your budget can prove challenging. In this case, you have to decide what you can live with and what you can’t live without.
Here’s a look at four rules to help you decide.
Rule #1: Know where your money goes
Before you can evaluate your budget and decide what you can live without, you first need to determine where your money goes each month. There are two types of monthly expenses: fixed expenses and variable expenses. Go back and track your spending for the month. Gather receipts, check your bank account or review your credit card statements. You want to get an idea of what you spend your money on, and how much you spend in various categories.
Rule #2: Prioritise your spending
Once you determine your variable and fixed expenses for the month, rank these in order of importance. This step can help you narrow down expenses that aren’t a high priority. Rankings vary for each person, depending on what you owe; but an example of a prioritized report might include:
- Electricity/water Cable/Internet
- Auto loan and other transportation costs (auto insurance and gas)
- Insurances (health, life, renter’s, etc.)
- Student loan
- Credit card payments
For each item on your list, include how much you spend monthly, or a close estimate. Typically, the items at the bottom of your prioritized list are those you can live without. It’s important that you’re able to afford fixed expenses. So, if entertainment is a low priority, you need to reduce how much you spend in this area to ensure there’s enough money for more important monthly costs. And if credit card debt is your second lowest priority, develop a strategy to pay off any remaining balance. Once you eliminate credit card debt, use the extra money in your budget for other expenses or build your savings account.
Rule #3: What do you fight about?
Even if you prioritize spending, you may feel that everything on your list has a purpose, or you may feel that you already spend a reasonable amount in various categories. In either case, you might have to look beyond the list.
For example, do you and your spouse fight about money? If so, what are the majority of your money fights about? Sometimes, just paying attention to the money discussions you have can help you assess things you can live without. For example, your luxury vehicle may rank high on your priority list. However, if you have an enormous monthly payment that reduces cash flow into your household, and if this car payment triggers many money fights with your partner, as some point you have to consider what’s more important. In other words, do you keep a car you love, or save your relationship and finances?
Rule #4: What don’t you use?
Sometimes, miscellaneous monthly expenses take a chunk of your income and make it harder to pay essential bills. These might include a gym membership, cable, housekeeping services or lawn care services. Separately, these expenses aren’t much. But together, they can add up to hundreds each month. So, take a close look at how you’re spending your disposable income and determine which services you really need or use. For example, if you have a gym membership but you rarely step foot in the gym, getting rid of this expense frees up cash in your budget. Likewise, if you own tools to manage your own lawn, do the work yourself and save money. And if you spend $150 per month for cable, yet you never have time to watch TV or you only watch a handful of shows, downgrade to a cheaper package and get what you need for less.
Determining what you can live without requires some serious brainstorming. However, once you’re able to reduce expenses and fix your budget, your personal finances will improve and it’ll be easier to reach long-term financial goals.
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