Like a good Financial Slacker, you are diligently tracking your expenses with Personal Capital. But even so, you don’t seem to be saving much money. Maybe that’s because you are focused on the wrong things. Save thousands more by focusing on the right things.
While it’s easy to see savings opportunities in all those small expense categories, you can’t ignore the big-ticket expense items. At first glance, those smaller expenses look like low-hanging fruit because they are easier to reduce and require very little behavioral change. The problem is that no matter how much you reduce the smaller expense items, if the large expenses are too big, you cannot make up the difference.
Instead, start a systematic approach of evaluating what’s important to you, prioritizing your spending choices, and having a willingness to make hard choices. It’s not an easy process, but the rewards are worth it – saving thousands of dollars per year, financial independence, early retirement, higher quality of life.
Ignore Big-Ticket Expenses to Your Own Detriment
When it comes to personal finance, many find themselves getting bogged down in the details and losing track of the big picture. This is especially the case with expenses. It’s easier to cut small expenses than to cut larger ones. Giving up going out to eat once a month is much easier than moving to a smaller house with a smaller mortgage. As a result, most people ignore trying to reduce the larger expenses and instead focus on the smaller ones.
The problem is that while those small expenses certainly can add up and become a problem, only cutting back the small expenses without also focusing on the large expenses won’t get you where you need to be.
I am not suggesting that you forget all those frugal spending habits you’ve been developing over the years. If you regularly spend $7 for morning coffee, another $12 at lunch, and $20 at dinner, you probably have a spending problem. And while that’s bad, if that’s the biggest of your financial problems, then you’re probably in pretty good shape. So while you’re busy cutting back on your small expense item spending, if you want to save thousands more, don’t neglect the big-ticket items.
The Elephant in the Room
When we’re talking about big-ticket expenses, what we’re referring to are those that really have an impact on your ability to save and reach financial independence. If you have big expense items such as a large mortgage, luxury car payments, private school tuition, a country club membership, and an annual vacation budget larger than the salary from your first job, you will have trouble reaching financial independence.
For many, these relatively fixed expenses can easily consume more than 50%, 60%, or 70% of their spending budget. And changing your pattern of only going out to eat once per week might make you feel good, but it’s not going to help offset the big-ticket items where you really spend your money.
But it’s hard to talk about reducing these big expenses, because unlike changing smaller expenses which may only require a behavior modification, changing big expenses will require a lifestyle modification. Are you ready, willing, and able to make that change?
Reduce Your Big Expenses and Save Thousands More
There is only so much time in the day. And we only have so much willpower. So just like any other resource, your time and willpower must be managed and allocated efficiently. Cutting small expenses may feel productive, but to get the most bang for your buck, you need to cut the big-ticket items.
Take the following steps to get started managing those large expenses:
Evaluation of what’s important. Like any analysis, start with a plan. Decide what is important to you. It doesn’t matter if it’s important to someone else or if you read about it here or anywhere else. What matters is what’s important to you. Without an honest assessment, you will never be able to do what comes next.
Prioritization. Once you have evaluated what’s important to you, start prioritizing. When it comes to spending, it’s less important what you buy than how much you spend. If you like cars, buy a nice car. But realize that if you are spending money on a car, you may need to cut back on your housing costs. The real key is realizing there are trade-offs. Take in one area and give in another.
Willingness to make hard choices. This is the tough part and why it’s easier to save money by cutting small expenses. Changing homes, selling your car, cutting out the luxury vacations takes willpower. But realize, if you save the money today, you can reap greater benefits tomorrow. Start building your delayed gratification muscles. Once you get them in shape, it will get easier. But that first time you decide to downsize, you will feel the hurt.
Perfectionism is a polite way of saying procrastination. No matter what you do, there is probably a better way to do it. Depressing? It shouldn’t be because there is probably also a worse way to do it. Perfect is not a realistic goal. Instead of seeking perfection (in which case you will never get started or you will be disappointed), do as best as you can and keep making things better. How many technology products launch with glitches and bugs? Most of them. Hopefully, the glitches and bugs don’t prevent the products from actually being used, but by launching and getting something out there quickly, you know whether what you have is worth additional effort.
Activity drives more activity. When you find yourself spinning your wheels. Or you are listening to the voice in your head too much. Stop listening and start acting. It’s called behavioral activation. And the simple explanation is that by doing something positive, by taking a step forward, your perspective changes, and that will lead to more actions. To get started, you must overcome the initial resistance and once you are moving, it’s easier to keep going.
Following through on these steps will move you from feel-good saving to hard-core saving. And not only will you save thousands more, you will come out of the process with a greater appreciation for what’s important in your life and what’s not. That should help guide future purchase decisions.
Readers, where does your money go? Could you save thousands more by focusing on your big-ticket expenses?
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Anything beginning or with the thought of luxury is usually going to negatively impact your financial situation. Starting out with a plan is a great way to get your goals down in writing. This usually creates a new dimension of dedication to the plan. Once the plan is carried through the first time it will be far easier in the future. Like yourself, I do not tell my readers to ditch everything in life and live with the bar minimum. However, I think we all have expenses to cut and those small expenses can really add up to major cost once the numbers are put onto paper.
I agree that writing down your goals is usually more effective than not. It’s helpful to compare progress throughout the year. And I especially like looking back a few years down the road and seeeing how far I have come.
The combination of cutting out a lot of eating out, trimming groceries and wine budget and really going after travel,hacking has made major inroads to increasing our savings rate. And the snowball effect of finding more things to tweak all adds up to quite some savings.
It seems to me that almost everyone I talk to has a problem with their going out to eat budget – me included. For many, the cost of a meal out is comparable to a week’s worth on groceries. And it really does add up.
When I look at most people’s spending, all of the “other” stuff runs about equal to one of the bigger expense buckets – house, car, etc.
You’re dead right FS, small savings aren’t going to make much difference to the big picture are they. No point giving up daily coffee on the way to work and reducing expenditure by $500 and then spending your 2 week holiday in a 5-star resort.
For me personally, reading Mr Money Mustache’s blogs from start to finish put me firm ly in the picture about what I had to do to become financially independent. And from there I now keep on the straight and narrow (most of the time) reading bloggers like yourself.
It has to be said, for someone making the decision that they want to go down this path, that it certainly is a long and winding one.
That’s my thinking.
For instance, if you have too much of your spending tied up in your house, that is really the only thing you have. You can’t spend money anywhere else and for most people that’s not practical. They want to travel. They want to go out to eat. Having big fixed expenses limits your flexibility.
People will definitely save the biggest amount of money with their biggest expenses, though every level of expenditure is worth having a look at.
Luckily we haven’t needed to go through a debt-laden journey, or spending tons of money to reach this conclusion. If we can keep our expenses at roughly the same level, and grow our income from here. This should really benefit us in the long term 🙂
Tristan
That’s the best way to save. Let your income grow while your expenses stay flat. As soon as you start spending that increased income, it becomes harder to go back.
FS – This is a great reminder. I know i have fallen into that thought process before where we avoid going out to lunch a few times a s month but then start looking at buying a newer car. Thankfully we’ve also been able to keep those larger purchases with in a reasonable range of spending at the Level Up Money household.
Another thing is that we started budgeting for them a few years back and this has helped. If we don’t have the money then its too bad and we will have to wait a little longer.
Having the discipline to set up a spending fund for those big-ticket items like cars is so great. Once you realize how much financing a car costs, it really makes so much more sense to save up and pay cash. Plus the added bonus is that you don’t buy what you can’t afford.
Great tips FS. Focusing inn the big items can make a very meaningful difference in your ability you save and invest. Some of the big items we’ve managed to cut include our utility bill by going solar, cutting cable, car pooling and a few others. A thousand dollars here and there added up year after year can be very meaningful.
I have seen a number of my neighbors make the leap to solar, but I haven’t jumped yet. But it’s a great idea, especially living in the southwest.
Might be time to look into it.
Thanks.
The big changes are the toughest to make, but they’re often the ones that make us the happiest in the end because they change our mindset from always wanting more to one of having enough and gratitude.
That’s exactly my mindset. It’s so easy to get caught up in having more and wanting more. The circle never ends.
Seek out investments both in financial terms and in life terms. Find things that give back and you’ll be happier.