I thought I would blog this month on the subject of trimming personal expenditure - although I must confess at the outset that I’m not a huge fan of trimming expenses and cutting costs!
When it comes to the subject of personal finance (or even business and public finance, for that matter) there are two sides to the ledger. On the one side you have your income and profit, and on the other side you have your expenditure and/or loss. To me the income and profit side is the fun side, and it’s the side I spend the majority of my time concentrating on when it comes to the subject of personal finance. The reason is simple and logical; if you have enough money then you won’t (or don’t) need to be as concerned about the expenditure side, because you will always have enough funds to pay your bills and expenses!
Hence I find it enjoyable to participate in, study, and write about the activities of investing funds, the compound growth of money, how to maximise returns and track the growth of money etc., as it’s really quite fascinating to me. I don’t find it as much fun to have to trim expenses and cut things out of my life in order to meet budgetary constraints. Trimming expenses is quite depressing and seems to rob people, including me, of the joy of life – hence my reluctance to write this article!
The challenge is, of course, that if you have certain expenses which need to be paid and you don’t earn much money or if you don’t have much in the way of personal financial means, then you are left with really only two options; you either have to go into debt in order to fund a consumptive lifestyle (which has all sorts of negative future consequences, as the debt will have to be repaid one day) or you must trim your expenses and cut your spending until your income meets or exceeds your expenditure.
In fact, just last week the New Zealand Government released their yearly budget in which they outlined plans to trim government expenditure through proposing cutbacks to schemes like Kiwisaver, ACC, certain WINZ benefits as well as a few other areas. Many New Zealanders are complaining about what these proposed changes will mean to them personally, but the reason the Government wants to implement these changes is because they are currently borrowing around $380 million a week, or close to $20 billion every year, to fund consumption in New Zealand and this debt eventually has to be paid back – with interest. (And you thought you had problems meeting your mortgage payments!)
So here’s a few tips on trimming expenses which I hope might be of help with your personal financial situation.
Create a budget
You can’t trim expenses – at least not effectively – unless you know how much money you have coming in and to what areas and categories of spending you have allocated the money.
It’s surprising how many people don’t have a budget in place although they are not hard to set up. (In fact if you would like a free copy of a simple MS Excel budget spreadsheet from Fit 4 Life, please contact me at Bryce@htlministries.org.nz and I will email one to you).
Thinking through your expenses, collecting and tabulating your bills, and creating a simple budget is a very helpful exercise and is the first step to making significant savings when it comes to trimming expenses. If you don’t know how much you have coming in and where it is going, you will never be able to make any meaningful changes in your spending patterns.
Know your annual percentages
When it comes to trimming expenses it is helpful to know percentages. You would think most people know which of their personal expenses are the largest – and they probably do for big things, like rent or mortgage payments, and food etc.
However, for all the other activities where we spend our money during the year most people have very little idea of how much (percentage-wise) of their money is being spent in certain categories. Off the top of your head, for example, how much are you spending on eating out, or on your cell phone plan, or on your annual credit card fees, or even on your pet?
Following on from my point on budgeting, I find that by converting all of our personal and home expenses – whether they are due on a weekly, fortnightly, monthly, or 6-monthly basis etc – into an annualised figure and then converting that figure to a percentage gives me very useful information when it comes time to make cut backs in spending and trimming expenses.
For example, our home budget shows me that we are currently spending about 5.4% of our total annual income on power (electricity), whereas we are spending only 1% on water usage. If I wanted to start trimming costs, a simple percentage comparison like this shows me that it will make more sense to begin educating my kids about turning the lights off or powering down electrical appliances like computers, the television and so on when they are not being used, rather than getting upset with them for leaving the water running while they brush their teeth. The percentage calculation helps me see that the savings we could make by reducing our electricity costs are potentially much greater than by our household taking a fastidious approach to water conservation.
Knowing the percentage of annual spending in a particular category also helps me gain perspective in other areas too. For example, when I get my annual car insurance bill for $350 it’s easy to react about how outrageous that is, but I can see on my budget spreadsheet that it represents only 0.3% of total annual expenditure. In comparison, me buying my lunch at the local bakery twice a week at $5 per time adds up to 0.7% of total expenditure throughout the year, so that’s probably a better place to look at trimming – rather than me shopping around on the internet for a couple of hours looking for a cheaper insurance company!
Go for the deal rather than being fastidious
When it comes to cutting expenses it’s sometimes easy to slip into the trap of saving pennies when we could be saving dollars. As an example, there are two movie theatre complexes which my wife and I frequent. One is 10km round trip from our house and the other is 20km round trip. A fastidious cost cutter might reason that, with the price of gas around NZ$2.00 a litre and the average car consuming 1 litre of petrol for every 12km or so, it costs around $1.67 to drive 10km, and so that would mean we could potentially save $1.67 by frequenting only the closer movie complex. Also with the price of an adult movie ticket costing $16 at the nearby complex – compared to $16.50 at the further away one – it would seem like a no-brainer to frequent only the closer theatre, as we would save $3.67 each visit. However this type of trifling-saving pales in significance to ‘going for the better deal’.
With the price of movies as they are, it makes better sense to buy tickets in bulk and/or go on the cheap night. On Tuesday nights movies costs $11 at both complexes, so the total cost for my wife and I to see a movie on a Tuesday night at the further away theatre is $25.33 (2x$11 +$3.33 petrol) compared to regular price $33.67 (2x$16+$1.67 petrol) at the near complex. That’s a saving of $8.34 and that is reasonably significant. If we went every two weeks to see a movie it would add up to a saving of around $200 a year. (Of course, going on the cheap night to the closer theatre would cost us only $23.67, which is $1.66 cheaper, but then you’re really only saving the money on petrol for driving 10km less which is not the primary cost – or the primary reason – for going to the movies!)
You can also buy booklets of 10 tickets for $135 ($13.50 per ticket) at the far-away theatre and you can go anytime. That discounted price works out to be 22% cheaper than buying the regular ticket for $16.50 and that represents a decent saving of $6.00 for my wife and me each time. (In fact, a book of 10 tickets at the closer theatre costs $140, so there’s really only $0.67 cents difference between the two theatres to go any night of the week if we go for the deal! ((2x$13.5 tickets +$3.34 petrol) – (2x$14 tickets +$1.67 petrol) = $0.67))
I also get our BBQ gas bottle filled at the local BP station and I have a discount card for 6 bottle fills. The card gives a $3 discount on the 2nd fill; a $4 discount on the 4th fill; and a $5.00 discount on the 6th fill. That’s a $12 saving over six fills and – with an average fill costing me around $35 each time – my saving after six fills is $12/$210 or ~5.7%. That’s not huge – but I’ll take it, because it’s a deal and I don’t have to go out of my way or dramatically change my spending habits!
My point here is that when trimming expenses you don’t have to turn into some kind of cost-cutting nut or have to radically alter your life. But you can make some reasonable savings if you ‘shop for the deal’. Lots of stores give deals so start asking around… you might be surprised what you find.
Technology is helpful but beware of ‘sales’ and impulse buying
Last week I went out to buy a book for one of our Fit 4 Life volunteers as a thank-you gift to them. I knew which book they would really like to own, and when I found the book on the bookstore shelf its price was NZ$157. I was almost at the sales counter getting ready to buy the book when I had a thought, and realised it might be cheaper to order the book through Amazon.com. I called my wife on my cell phone and it turned out that she was by her computer. She checked the price and – even with shipping from the USA included – we were able to buy the book for NZ$90 and saved $67. (It also arrived within four days which was impressive).
All that to say that modern technology can be a great way to save money if you know how to use it wisely. However the internet, or any modern media like TV or radio for that matter, also has a huge downside to it in that you are constantly bombarded with advertising which makes you feel like you just ‘have to buy’ something that ten seconds before you never even knew existed!
Also, one of the greatest marketing gimmicks is when something is advertised as being ‘on sale’. Just because something is marked as ‘40% off’ the regular price doesn’t mean you have to buy it! In fact if you have not budgeted for it and you don’t really need it, then all you are doing when you buy something on ‘sale’ is spending less money than if you bought it for the full price!
You do not save money just because something is on sale. You only save money if you need the product or service, you can afford it and then (if you’re fortunate) you find the product on sale for a cheaper price somewhere else – like my earlier example of buying that book.
The advertising and marketing industry is set up to create dissatisfaction. They are very good at it and so you constantly need to be on your guard. In fact our church pastor had a good, practical suggestion last week to help control impulse spending. He said if you feel the urge to buy something, go home and wait two days and think about it. After two days if you still feel that you really need the product – and you can afford it and have budgeted for it – then go back to the store and buy it.
Watch out for impulse buying and the deadly ‘sale’. These practices can really hurt your wallet – especially when you are trying to trim expenses!
(I should also reveal that when I was trying to buy that book I failed to get on the phone and call around the different bookstores to find out the price, so I ended up driving to three different bookstores before I found it and wasted about $7.00 of gas in the process! But hey – that’s life, and nobody does it perfect all the time!)
Here’s to intelligent and practical ways of trimming personal expenses…
Bryce – Fit 4 Life Director