Optimizing Your Expenses – One of the Keys to Financial Freedom

Doesn’t “optimizing your expenses” sound so much more fun and important than cutting your budget? I think so, and that’s the perspective I like to take on finding places to cut back on expenses. So far I’ve talked about making your plan to pay off non-deductible debt, protecting yourself and your family (both your personal property and your life/ability to earn income), protecting your identity, and protecting yourself from bad investment behavior. For those with kids, I recently talked about the importance of creating a college compact  to be clear on what they can expect from you in terms of helping with college. Now I’ll talk about optimizing your expenses, one the the remaining key components to a solid financial foundation.

Why is it important to optimize your expenses? Here are my top 5 reasons:

  • The less you spend, the less you need: The 4% withdrawal rate, which is the amount you can safely withdraw from investments each year without running out of money, is intended to cover all your expenses. The less you spend, the less you need to have 4% cover all your expenses
    • Example: Say you currently spend $60k per year. Using the 4% rule, you’ll need $1.5 million to retire. If you can lower your expenses to $40k per year instead, you only need $1 million – a difference of half a million dollars!
  • The less you spend, the more you can save and invest: Growing the gap between your income and your expenses is the only way to pay off debt, save, and have money to invest. Optimizing your expenses lets you free up money to meet your goals and achieve your dreams
  • You can align your spending with your dreams: You might be spending money on things that aren’t actually important to you. You  might be thinking you “don’t have enough money” to pay off debt, save, invest, and achieve your dreams. By optimizing your expenses, you won’t find yourself being one of those people that has hundreds of dollars in cell phone/cable/internet/SUV/other bills while feeling that you don’t have enough to save for important financial goals, and your dreams
  • Cutting fixed expenses lets you choose once, save always: J Money of Budgets are Sexy found out the power of this concept in his “Challenge Everything” series. When you are looking at your expenses, there are two types according to accounting – fixed and variable. Fixed expenses are a steady dollar amount, and variable change month to month. When you make a choice that lets you cut a fixed expense (say, your cable bill), you bank that money every month without needing to do anything else. Cutting variable expenses is very useful too, but you need to make the same choices again and again, month after month, to keep seeing savings
  • You can choose where optimizing means to spend more-and where it means cut back: Optimizing your expenses doesn’t always mean cutting back. Perhaps your cash flow analysis showed that you’re spending $250 per month on a cable/internet/home phone package. Cutting that back to $70 per month for internet, Ooma, Netflix, and Amazon Prime frees up nearly $200 per month – $2,400 per year! – that you could re-direct into a vacation
The Financial Pyramid will help you reach financial freedom
Optimizing your expenses is part of creating a solid foundation to achieving financial freedom, by putting the 4% rule to work for you

My Story

I’ve briefly told the story before of the time five years ago my husband almost died of septic shock, and I had to pull the trigger on my emergency plan. When I recapped my 20 years of striving toward FI, I talked about how that event was a turning point for me and my family, causing us to aggressively get out of debt, save and invest, and now be on the path to paying off our 15 year mortgage early. Today I’ll dive into some of the nitty-gritty of what exactly I did to get us out of that debt in under a year.

Even though it was almost five years ago now, I can remember it like it was yesterday. After my husband came out of the coma and started to (very, very slowly) improve, I quickly realized we were going to be in financial trouble. We had a car payment weighing on us every month, and I had student loans that were still accruing interest as I was finishing up my MBA. Our expenses had suddenly, drastically increased and our income had gone way down. We were in hair-on-fire, emergency mode, and tracking every single penny in and out became key.

Instead of putting everything on a credit card, or burying my head in the sand to hide from the crisis, I faced it head on. I had to free up cash to pay for all these increased expenses, and quickly. So I tracked all income and expenses, and as every single expense came through, thought about how I could optimize it.

  • Home phone, which at that time was through AT&T and cost $50? Listened to Clark Howard and switched over to Ooma. $120 up front, and my bill is now $4 per month. Total savings in five years? $2,760
  • Internet? Switched to the lowest cost plan, saving about $10 per month. Savings over 5 years – $600
  • Cable? We already didnt have that, as I mentioned before. But over 7 years, by switching to Netflix/Prime, I easimate we’ve saved at least $100 every month-or $8,400 in seven years!
  • Eating out, new clothes, entertainment? All variable expenses that can be cut to zero when needed. This is when I began my quest to find free and frugal entertainment, which you can find everywhere if you look hard enough
  • Food? This can be thought of as a variable expense with a fixed component. There is a food “floor” that you need to spend to not starve. But above that, food is highly variable, and you can choose to pay for extra-or not
  • I developed my deal strategies during this time, to make sure I was always getting a good price. When you work all day, go to MBA classes all night, have to visit your husband in a rehabilitation center after class – you have NO TIME to shop around. So not buying stuff was the path of least resistance, and when I absolutely had to buy things (like food) I’d do one-stop warehouse club shopping

I would repeat this process every time an expense came in, trying to see how or if I could cut it back. Eventually I ended up being able to cover the extra $1k per month in child care bills, and once that ended, deploy the extra cash flow to quickly annihilate the debt we were carrying (freeing up even more cash flow). Some of the variable expenses have been ramped up from their emergency low, but for the most part I’ve kept them down because the extra cost just isn’t worth it.

How to Do It – Three Steps

  1. Check your cash flow every day
  2. See how you can optimize what you spent that day
  3. Repeat

It’s really that simple. By taking it one day at a time, you’ll have optimized (or be on the track to optimizing) your expenses in a single month. As each automatic bill comes due, you’ll research alternatives to save money. Cutting down on cable, cell phone, home phone, electricity, oil, trash, water, food, clothing, etc. – some of these take time, some can be done that day. Really give thought to each expense that crosses your checking account – is it bringing value to your life or is it just mindless spending? Can you optimize this by not buying it, by making it, or by seeking out an alternative?

When it comes to optimizing expenses, I like the advice that Amy Dacyczyn gave in The Tightwad Gazzette (one of the four books that changed my financial life). Cut back on an item until it hurts, and then bump it up slightly until you’re comfortable.The Frugalwoods used a similar concept in their year of extreme frugality, where they cut back everything possible to see what needed to be added back into their lives – and what could stay out permanently. Sometimes going scorched earth (as Dave Ramsey says) is the best way to figure out what really is a priority, what’s actually worth the money – and what should stay out of your life/be cut back permanently.

So I would do things like completely cut eating out, and then including it again as a special treat. Today my rule on eating out is that it’s a once a month treat, and it has to be something I can’t make myself. I’ve had way too many incidents where I’ve eaten out and the food is both (A) expensive compared to home and (B) no where near as good as I can make. I’m not paying extra for that! I purchased all my clothing at thrift stores and consignment shops, and realized that I can get better quality clothes than Macy’s for a price lower than Walmart. I’ve also had some frugal fails, like purchasing a  couch set from a furniture outlet and having it start falling apart after only a few years. I found that home phone service from AT&T was not worth 10 times the cost of Ooma service, but real Ziploc bags are worth paying for over generic ones (I pick them up at the warehouse club now).

As I mentioned in my article last week on scoring deals, you need to treat your life like a laboratory experiment in order to find an optimal spending strategy for you. Give new strategies a try! Make your own food instead of buying it, switch cell phone carriers, cut cable, cut down on your internet speed, swap a home phone for an Ooma (or cut it out), check out a consignment shop near you. Maybe these things won’t work for you – but maybe they will! You’ll never know until you give it a try.

I Want Your Ideas!

Where have you optimized expenses? Have you cut back on something to achieve your goals and dreams? Have you ever used money freed up from an optimization to do something else that brings joy into your life? Let me know in the comments.

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13 thoughts on “Optimizing Your Expenses – One of the Keys to Financial Freedom”

  1. Cutting cable is one of the easiest ways to save money (and time) I don’t have cable and it probably saves $400 a month. In addition, I don’t sit in front of the TV which gives me time to work on myself and read!

    One suggestion for your site: it seems the reading window is a little cramped. At least for me, I like having a wider reading space.

    Looking forward to your future content 🙂

    1. I haven’t had cable in a long time-so agree on it being one of the easiest ways to save time and money! And thanks for the suggestion on the site-are you reading on a mobile device or on a computer? I can take a look at that this weekend.

  2. The Grounded Engineer

    That is an incredible story. My wife and I went to graduate school at the same time and it was so difficult. I can’t imagine throwing the extra hurdles into the mix that you had – great job managing all of that!

    I agree 100% that you need to be watching your finances often. We review everything that we spend each Sunday morning as a family to check in on how we are doing against our budget.

    Finally, one thing that helped us optimize our expenses was setting up an amortization schedule to know the date when our debt would be gone.

  3. We cut Netflix and Sling.com this past month and are taking the $45/month and putting it into our Vanguard Roth IRA. Cutting the fixed expenses and changing them into fixed investing methods has helped us save more and live on less. We need to work harder at lowering our grocery bill, but since we have just started a new diet, we have gone over and will hopefully make less trips and become more efficient next month!

    1. Ugh, that grocery bill can be so annoying! It’s one of those places where you need to try to save money every week, so it’s hard to make lasting changes. We switched to a “pantry and sales” method, where we only buy to refill our pantry or pick up a loss leader sale. It helps us save time and money by only getting what we need every week.

  4. We’re constantly making little tweaks here and here. Kind of like the personal finance version of continuous improvement. First it was cable, then phone. Then we removed house cleaning when my wife became a stay at home mom. Food costs came next as we start buying fresh fruits from the farmers market or growing out own…

    1. It’s almost like a game of limbo -how low can you go? I’ve noticed sometimes if we don’t pay attention some of those variable costs sneak back in again. So I make sure to check in and make sure expenses are optimized every once in a while.

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