It’s not about suffering, it’s about weighing the efforts intelligently. Follow these 8 steps to reduce your expenses as much as you can.
- Budget cap your expenses
Here’s the easiest tip of all. Budget your expenses. Cap how much you are willing to spend on every category of spendings and stick to it, firmly. What happens if you tend to overshoot? Either revise your budgeting strategy or adapt your priorities. What happens if you have an emergency then? Well, that’s what the emergency fund is for! If your boiler breaks in December, it justifies the expense.
Most of the time, people justify their spendings as “it’s only so much more, it won’t hurt”. The problem is that with that mindset, people do not grasp the true impact of compounding “small” bad decisions over time. Those “bad” decisions represent foregone opportunities of making money work for them. Instead, it keeps them stressed since they need to work more in order to cover expenses. To prevent that, think of acceptable budgets that will not prevent you from being happy nor living comfortably and stick to them. Over time, you will have learned, and earned!
- Cut interest expenses
Interests are silent killers. Nothing eats your wealth quite like interest expenses. The topic of debt is one that divides. We use debt in our daily lives, we take on mortgages, we use credit cards and we are fine with paying extra for the privileges that we get through the expenses. However, it’s sometimes wise to put things into perspective.
The only way that you are getting something out of your money when borrowing is if the periodic returns of your operation exceed the periodic interests. That’s–most of the time–not the case for the use that the average people make of debt. Most of us do not learn to be cash-flow positive. On the contrary, using debt for something that does not produce income is like putting a multiplier on the cash that is eaten out of your wallet. It makes it much worse, especially over time.
In short, the best way to use debt is to not use it, or to use it to buy something that will provide more returns than it will cost in interest. How about your mortgage then? Well, we understand that most people are not able to afford a home without one and that therefore they contract a mortgage. If buying a home is really something that you view as a good option (the choice is not always as straightforward as we tend to believe), then perhaps you can be really careful not to take on any more debt. For instance, no car loan because you find an alternative or downsize your car budget, and no credit card interests. We also tend to take loans for other things such as education, reworking our homes, … The worst kind of loan is the small consumer loans. Try to do without it.
It’s always best to do a cost-benefit analysis when deciding. To do it correctly, you have to include all of the interests that you will be paying over the years, and what it will prevent you from enjoying. That is the opportunity cost. Whether it is an extra monthly budget or an even larger opportunity cost of having invested that money for the future.
- Spend extra only when you have an extra budget
In light of the first tip–budget cap your expenses–only allow yourself to spend extras when your budget suddenly rises. Say that you budgeted a monthly budget of 200€ for leisure expenses but this month; you received a nice little bonus from work. You’re confident about investing 70% of it, but you want to enjoy the rest for a special little something. You start researching flights on Google to get away for a weekend. Are you right to do so? It would appear that you found a way to win twice.
1] You earned a bonus and you want to enjoy it. You’ve been making efforts for a while, including financial ones, and now you want to reap some of the rewards. You deserve it.
2] However, you’re still looking up to your future. You’re being conscientious since you decide to invest the major part of your bonus.
It’s not always hard to be conscientious and to enjoy at the same time. How about feeling good because you favoured both the short term and the long term? Sometimes you need to remind yourself of why you make all these efforts. But at the same time, you want to keep thinking about the next good things down the line.
- Limit your cash availability
When it comes to not spending, a very efficient strategy is to act as if you can’t afford it. It actually gives you a boost of confidence to know that you could, but that you don’t because you favour something else. It’s much easier to do so when the money is not there to tempt you of spending it. When you took the care of splitting your accounts wisely.
An effective solution to limit your spendings is thus to make sure that the only cash that you keep on your bank account is either part of 1) your budget (see point 1) or 2) your emergency fund. Putting away all of the cash that you are not supposed to spend in savings–or better in investments–prevents you from spending it. Such a simple solution can really instigate responsible habits.
- Amortise your expenses, use vaults
This one might do more harm than good to tech addicts that buy the new iPhone each time it comes out. An effective strategy, that is somewhat the prolongation of budgeting, is amortising expenses. Amortising refers to the fact that when companies integrate an asset into their balance sheet, they decrease its value over the years. This allows them to tie the cost of using an asset with the revenue it generates. However, it also helps them plan for replacement and to account for the deterioration of the asset in question.
So how does this apply to you? We all somewhat plan in our head that our phones, computers or cars are only going to last for so long. We usually anticipate that in the next 3 to 5 years, our phone is going to be old and slow, so we will buy a new one out of need. In that situation, it could be good for you to spread a budget over the years. Neobanks like Revolut or N26 have Vaults included in their apps. Simply put, a vault is a subdivision of your bank account in which you lock away money to be reopened for a given purpose. It simple but effective, and you can still revise your plans at any time. It doesn’t require you to commit to long-term placement like fixed-term savings accounts.
Ideally, you would gradually place a bit of money in each vault until you reached a budget you are satisfied with. If you plan to replace your current phone with another 350€ phone in 2 years, wiring 15€ per month would quickly help you reach that plan. The reason why this strategy is perhaps a bad idea if you a tech or materialist compulsive buyer, is that you will tend to allocate too much of your money towards such purchases. That is obviously something to avoid. In that case, it also prevents you to invest that money for better returns. Best do that with important expenses that you can anticipate but stick to a few of them. In the end, vaults are simply a budgeting tool and they push you to stick to your plans.
Avoid the end-of-month pain. Plan your expenses. Stay in control of your wealth creation.
- Pay extra attention to recurring expenses
Recurring expenses are a trick to the mind. From a company’s standpoint, subscriptions are very attractive. From an individual’s standpoint, not so much. The thing with subscription prices is that over the period advertised, usually a month or a year, the amount seems perfectly reasonable. That is why we go ahead with the purchase. However, over time, those amounts are easily getting silly. Let’s compute an example.
Monthly subscriptions (price are rounded for readability):
- Netflix – 8€
- Disney – 9€
- Amazon Prime – 4€
- Spotify – 10€
- Gym – 49€
- Phone bills – 15€
This already equals 95€ per month. Over a year, this equals 1,140€. Investing 1,140€ yearly, during 10 years at an 8% APY equals 17,835€. 6,435€ would have been generated from investing 95€ each month over 10 years.
So what do you do whit this piece of information? Should you refrain from buying any subscription? No, there is a reason for which streaming music is much more practical than buying CDs or individual songs on iTunes. It provides real value, and for a decent price. However, you should ensure to carefully manage recurring expenses. Because when you add them up to car insurance, rent, and other types of recurring expenses, they crush your future earnings. Make sure to prioritize your needs in terms of recurring expenses and to keep your costs under control. The numbers are quick to mislead.
- Minimalism > Materialism
This one could be controversial because it can quickly take a judgemental avenue. Luckily, science backs us; People who choose time over money are happier [Hershfield, H. E., Mogilner, C., & Barnea, U. (2016).]. Is this surprising? Not so much. We argue that well-being goes further than just preferring time over money. We believe that the minimalist lifestyle–whether financial or general–is one of the best ways to focus on enjoying what truly matters to us. Being less materialistic allows us to focus on our experiences, on our future plans as well as save a ton of money in the process. A win-win, truly.
It’s true, we might like brand new clothing, but does it really get us anywhere? Or what about we apply the rule “one out, one in” if we plan to buy a new item? This allows us to keep a reasonable amount of stuff as well as recoup some money if we sell an old item! Win-win. Most of the time, however, it’s arguable that we just feel an urgent need to buy something and that we don’t really need it. It’s also been proven that with limited money, we tend to prefer material goods over experiences. This is a bias because we believe that by buying possessions, the utility of purchases will last longer.[Tully, S. M., Hershfield, H. E., & Meyvis, T. (2015)].
All in all, this is a personal preference. But we’ve never encountered a minimalist with a bad financial situation. Simply remember that minimalism is about prioritizing what you spend your money on. It’s about going “no-frills” on what does not matter, but feeling even more satisfied with what we truly desire. Leaving materialism at the door is good for our emotions, it weighs less on us. Financial minimalism is one of the most effective ways to build long-lasting wealth. Up to you to find the equilibrium in consumption.
- Find and fix the leaking areas
Analysing your finances is something that we will always encourage. It allows you to get a complete picture of where your money is going. You might not realise it, but your wallet might be leaking somewhere. You might also find that you spend too much in one category to your liking. You will not be able to spot this if you do not at least wander into your payment history. Although looking at debit outflows is a start, it can quickly get overwhelming. This is why we are currently working on tools to help you spot those leaks and work on them. Sometimes you just need to act like your own financial plumber.
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These tips offer a good guarantee of being conscientious with your spendings. Time will do the rest.
We advise you to read this article: 10 ways to boost your personal finances.