We've all got them- deadweight monthly expenses that are dragging down our wallets and money goals. Kind of like Bran Stark during the battle with the Whitewalkers. #NotHelpful
Just like we have physical clutter, we have financial clutter, and these deadweight expenses are your financial clutter. By decluttering your monthly expenses, you make room for the priorities in your life, like saving for a big life transition, paying down debt, or having more breathing room in your budget.
When done correctly, reducing your monthly expenses doesn’t have to be a major bummer on your lifestyle. It should feel like you’re opening up more space in your life, rather than restricting it.
Ready to start reducing your expenses without sacrificing your lifestyle? Here’s how:
Step 1: Set a goal
Set a goal for how much you want to reduce your spending every month. Goals are specific, measurable numbers. “Reducing my spending as much as possible” isn’t a useful goal. “As much as possible” could mean a hundred different things to a hundred different people. Be specific.
When setting your goal, ask yourself, “Why am I reducing my monthly expenses?” and “What will I do with the money I save?” Then use your answers to set a goal.
For example, if you want to save $45,000 for a down-payment in five years, divide $45,000 by 60 (the number of months in 5 years). The amount you need to save monthly is $750- which is also how much you'll reduce your monthly spending.
Step 2: Audit your recurring expenses
Get 2-3 months of all your bank and credit card statements and find your recurring expenses. Then categorize your recurring payments as Obligatory, Daily, Occasional, or Rare.
Obligatory are expenses that you are required to pay, like:
Daily are things you use daily like:
Occasional are expenses that you use a handful of times a month. For example,
Rare are expenses that you use less than one or two times per month like:
After you've categorized your recurring expenses, start with the rare expenses and see where you can reduce your spending. Reducing can mean eliminating the cost, downgrading your plan, or finding a cheaper alternative.
You don’t have to cut every rare expense. For example, you only use your health insurance three times a year, but it makes you uncomfortable not to have insurance. It’s totally fine to keep it! On the other hand, maybe you have a low deductible and could reduce your monthly payment by switching to a plan with a slightly higher deductible.
When you're done reducing the rare expenses, work your way up to the occasional, daily, and obligatory expenses. For daily expenses, think about how you could reduce your costs, rather than cut them. For example, you pay for unlimited data for your cell phone, when, in reality, you rarely use data. You could downgrade your plan.
How do you reduce your obligatory expenses? You could:
As you reduce your recurring expenses, keep a list of the actions you’ll take and a running total of how much money you’ll save every month. Don’t worry if you haven’t hit your goal yet. We still have one more step to go!
Step 3: Audit your variable expenses
Return to your statements and now categorize your variable expenses, which is everything that's left! Instead of classifying them by use, you categorize them as Important, Semi-Important, and Not Important.
Important expenses are the ones you absolutely can’t live without like:
Semi-important are expenses that you enjoy but could see yourself living without like:
Not important expenses are the ones that you could easily let go of or reduce, such as:
Prioritizing the importance of your expenses comes down to your personal values. What's important to you may not be as important to another person. For example, if you value connection, eating out with friends and family is more important than leisure activities like going to the movies.
If you feel like all of your expenses are essential, here are a few tips for digging deeper into what's really important to you:
Start with the less important expenses and, just like your recurring expenses, decide what you can cut, reduce, or downgrade. Then, work your way up from the semi-important to the important expenses.
Hopefully, you reduce enough not important and semi-important expenses that you leave your most valued expenses alone and your lifestyle intact.
Once you reduce unnecessary expenses, use Otherhood’s expense calculator to to setup a golden parachute for those unexpected life expenses, like having children, education
Going through this process ensures that everything you spend money on is moving you towards what you ultimately want. It's like having a personal goal army. Every dollar is fighting to create the life you envision, and no one is sitting on the sidelines, just chilling.