Freedom Life Planning

The Ultimate Guide to Financial Planning

Spending Effectively: Part I

In this article, I will review many of the different ways I’ve learned to maximize the effectiveness of my spending to stay on budget and obtain my goals, while still getting the most out of life. There are a lot of websites out there that are about cutting costs as much as possible and living a very inexpensive or frugal life. That will not be the main objective of this article, as living a frugal life is not for everyone. Instead I will be discussing how to best optimize your spending while leaving it up to you to decide on how much you would like to splurge on the luxuries that you enjoy.

The first step towards optimizing your spending is to make a budget. If you have not yet made one, please see my article on How to Make a Budget. Now once you’ve done that, it’s time to start tackling the expense categories. As I describe in my article on budgeting, I like to separate my expenses into Needs and Wants. See the example below.

Needs are defined as the required spending that must be paid each month to go through your life. Luxuries are defined as special expenses for treating yourself, which is important for enjoying life. I’ve further separated each expense into specific categories. The more you divide up your categories, the easier it will be to cut your wasteful spending. By saying “wasteful” spending, I am not talking about the luxuries you enjoy. For example, treating yourself to a nice restaurant is not wasteful spending. Paying more for car insurance when comparing different quotes and renegotiating your premiums can save you 30% on the exact same service is an example of cutting wasteful spending. I will go over more examples for the categories above on how to cut on wasteful spending. Remember, it is up to you to decide on how much you want to allocate to each of your categories for your needs and luxuries. My advice below is on how to make your dollar go further to get the most out of the money you’ve allocated, not on how to live with less.

Rent or Mortgage

Whether you are renting or buying a home, these monthly expenses do not fluctuate regularly and need to be negotiated upfront. Once you’ve decided on your home, it’s time to put a lot of effort into negotiating the monthly rental amount or the home price. If you are buying a home, you can also negotiate the mortgage interest rate with the banks. Do not take the banks first offer even if they sell it as a great rate that they’ve worked out just for you. Get multiple quotes from different banks and challenge them all to beat each other. They will do better. Once you sign the lease or mortgage agreement, you are locked in for a longer period, so it is important to start your research early and negotiate the best price.

Transportation

Transportation covers car expenses, gas, and public transportation. Anything related to getting around during your day to day life. I would recommend breaking this category down further into these specific expenses to see what is costing you the most. For buying or leasing a car, negotiation upfront is very important. Car dealerships or even private sellers are almost always prepared to negotiate on price. Even if you are decided on a particular model, do not act overly enthusiastic in front of the seller or salesman. I suggest staying somewhat neutral. Show that you are interested in the car, but only if the price is right. For new cars, visit several dealerships, even of the same make and brand. These dealerships are competing against each other and will often give deep discounts to make the sale. Another tactic that can be used is to buy or lease a car on the last day of the month. The salesman will be under extra pressure to close out his sale numbers. However, never close on your first visit, there is always something more to be offered.

For public transportation, the only savings potential is to determine the most cost effective passes that you should buy. You are already saving a lot on transportation by avoid car ownership.

Groceries

Getting the most from your grocery budget is all about taking advantage of the rebates at different supermarkets. An app called Reebee can provide you with all the weekly fliers showing you what is on special. Sticking mostly to these specials will save you 20-30% on your grocery bill. Don’t think of it as being restrictive, but instead of a restaurant that is constantly changing its menu. Of course, there will still be regular food purchases that you will need each month regardless. Costco is a great place to buy groceries as they offer quality products in bulk for great prices.

The second area to be careful on is food spoilage. Well managed restaurants control their food spoilage to protect their profit margins. You should do the same at home. Do not buy more food than you can eat before it expires unless it can be frozen or can be preserved a long time such as canned or dry goods. Each time you throw out spoiled food, take a mental note of how you could have avoided this. In time judging your food needs will get better.

Utilities

For the utilities category I considered heating, electricity, internet, phone, and cable TV. Feel free to break them up into separate budget lines if you prefer. For your heating bill, make sure your home is properly insulated and energy efficient. Consider buying a heat pump. Many air-conditioner units can also be operated in reverse as a heat pump. To cut down on the electrical bill, I recommend switching to LED bulbs. The bulbs use a fraction of the electricity of other light bulbs while lasting much longer between changing them, so you don’t need to buy as many.

Internet, Cable TV, and phone can be negotiated with your telecom company. The trick here is to tell them you want to cancel unless they give you a discount. Almost all of these companies have retention or loyalty departments ready to offer you savings of 100-300$ a year for a quick 15 minute phone call.

Consider eliminating the landline if you always use your cell phone. If you watch mostly movies, consider signing up for Netflix or Amazon Prime Video instead of paying a monthly cable TV subscription. You get much better value (and better content in my opinion) with these online streaming methods.

Insurance

Car and home insurance like the telecom company bill can be negotiated by calling and putting pressure on the insurance company when you renew. The often have discounts that can be applied to your insurance premiums. Also, pairing multiple vehicles and home together with one company will provide additional discounts. If you still think you can do better, call other companies to get competing quotes.

Miscellaneous

The miscellaneous category can be a dangerous one. Left unmonitored, it can grow easily by capturing many unplanned expenses. Be sure to watch it closely and separate any major expenses into its own separate category for easier review in the future. For example, you could be spending a lot of money at the pharmacy each month for health and body products such as hand creams, soaps, toothpaste. Did you know that most of these products can be bought at Costco in bulk for much less? Costco is also a great place to buy laundry detergent and other household products.

Be sure to check out Spending Effectively Part II, where I  review luxury spending and more ways to optimize your spending.

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