Starting out: Where should you cut back first?

For a first time budgeter, cutting back on expenses can be daunting: where do you cut? why? how? and what is the best way to use that money?

I am here to suggest that you start with the hardest categories first, so that you get the hang of it & the rest will come as easy as pie.

FIXED VERSUS VARIABLE

Your expenses consist of fixed and variable categories.

Fixed Expenses: Anything you cannot change, and is a fixed amount per month to pay

• Rent
• Mortgage Payments
• Car Payments
• Home Insurance
• Car Insurance
• Membership Fees (such as the Gym)
• Public Transportation Passes/Tickets
• Home Telephone
• Cellphone’s Fixed Fee
• Internet Fixed Fee
• Credit Card & Line of Credit Minimum Payments

Variable Expenses: Anything that you can change (cut out or cut down) on a monthly basis

• Groceries
• Utilities
• Laundry (yes, you can choose to do less!)
• Eating Out
• Shopping
• Gas Expenses
• Traveling
• Cellphone Usage (Text messaging, Long distance calling, etc)

STARTING TO CUT BACK

If you can cut back on both at once, then kudos!

But if you started out slow like I did, then my best advice to you, is to track your normal spending for one month, formulate a budget out of what you spend, and start going through your fixed expenses.

Ask yourself questions like:

• Can I move to a cheaper apartment?
• Can I get a better rate on my mortgage?
• Can I get cheaper car/home insurance?
• Can I consolidate my credit card debt onto my mortgage?
• Do I really need a gym membership there?
• Can I cut down on my cellphone or internet plan? Or bundle?

Once you have figured out the savings in each fixed expense, multiply it by 12 (to represent a year).

That is your savings per year, and it can be surprising how $100/month is actually $1200 at the end of the year.

Once you get the hang of moving to a cheaper apartment, shopping around for better rates on your car and home insurance, you can easily tackle the next set of expenses: the variables.

So why cut fixed expenses first, over the variables?

1. You will already naturally control your variable spending if you are made aware of what you’re spending in general

So when you go to pick up something to buy on impulse, your monthly spending will flash through your head & you’ll think twice.

This doesn’t work on everyone (took 6 months to catch on with me), but eventually, if you start seeing small gains from a bit of hard work translate into big savings, you will begin to find ways to save in every category.

2. They are the hardest categories to cut back on because it means more work

Paying less in rent, means you have to either find a roommate to share with, or move out or finding a cheaper insurance means you have to spend time to check all the quotes.

3. They yield the most savings in the end

Once you cut back on your rent for example, you just pay the same amount every month and you can forget about it & save… times 12.

4. You have the most energy at the start of your promise to watch your $$

Use it wisely by attacking the one with the most amount of work (fixed expenses).

It takes time to find the cheaper car insurance, or to find a better cellphone provider or plan for your needs.

You do a routine check yearly, and then you’re finished.

5. You will see the results of your efforts instantly

If you start on variable spending, you might get frustrated and give up, because you are starting out & you want to see results ASAP.

You may decide to hold off on buying that new sexy laptop with the 17″ screen, but then decide to splurge on a netbook instead because it’s cheaper & it satisfies your craving.

It’s like when you first start to work out to build muscles or lose weight.

Within the first week, you are prodding your arms, legs and entire body to see if any change has happened.

If you start with fixed expenses, the change is immediate — you see it on your next bill for car insurance, or your cellphone payments are lower & you can see the savings because there is more money in your bank account.

If you started with variable expenses, you have to put yourself on a tough, back-breaking, regimen without a clue as to how you are supposed to do it.

Then you give up & you’re back to square one.

You have to take it slow, see some small but actual results, then gain confidence to stick to the regimen.

6.The plus side is you can use the money saved to pad up your savings

Please note that I didn’t say saving $100/month on your rent meant that you had a $1200 shopping spree. 😛

Those savings, should be automatically debited from your account each month into a bank account with high interest savings (ING direct is the PF’ers favourite savings bank of choice).

That way, by the end of the year, you will have $1200 in emergency savings, without having missed it at all.

Saving without feeling like you’re saving. It’s a wonderful thing.

Variable expenses are much easier to cut back upon

Why? Because they’re variable, and tied to how many times you take out your wallet to pay at the counter.

You can (in theory) just stop buying anything but food, and save a bundle. But I guarantee that you are going to go crazy climbing the walls without any (moderate) spending on fun.

What I don’t get is every time someone says: I need to save money, they inevitably stop buying as many groceries are before.

It sort of made my belly rumble, because while I understand buying cheaper brands, or shopping at cheaper grocery stores, I am not sure (and convinced!) food should be the first to get the axe.

I always look at the fun stuff to cut out first:

• Impromptu vacations
• Shopping (for anything that is non-essential)
• Eating out

It isn’t easy to cut back on what you are used to spending (eating brunch every Sunday with your friends), but it’s all part of the game.