Cutting Spending

LOOKING TO TRIM your spending? It’s hard to offer blanket recommendations. We all have different financial priorities, so a painless budget cut for one person might be wrenching for somebody else. Instead, you might mull four major spending categories—and think about which cuts would bother you least.

Major fixed costs. We’re talking here about houses and cars. Both involve big financial commitments, so changing course can be costly. For instance, you could probably save big bucks by trading down to a smaller home or a less desirable neighborhood. But making the change would involve not only hefty expenses, but also a heap of work.

Still, there are two savings that are relatively easily achieved. First, you could simply keep your cars for longer. Instead of buying a new vehicle every three years, you might wait six. Second, you could refinance your mortgage to take advantage of lower interest rates. Refinancing involves a fair amount of paperwork and some upfront costs, but you could recoup those costs fairly quickly through lower mortgage payments. There’s more on refinancing in the chapter on borrowing.

Modest fixed costs. The term “modest” is relative to houses and cars: You could still save serious money by trimming these other fixed costs, such as insurance premiums, cable service and phone plans. You can learn more about ways to hold down your insurance bill in the chapter devoted to your family’s safety net.

Investment costs. Many folks are unaware of how much they’re paying in investment costs, because it’s rare we actually write a check for the sums involved. Suppose you use a financial advisor who charges 1% a year and who invests your money in funds that charge another 1%. If you have a $500,000 portfolio, you’re paying $10,000 a year for money management. You could cut that sum almost in half by working with an advisor who favors index funds, a topic we tackle in the investing chapter.

Discretionary spending. As its name suggests, discretionary spending is entirely up to us. Think about how you spend those dollars. Does that money get spent on vacations you don’t especially enjoy or restaurant meals that aren’t so great? Maybe it’s time to rethink how you spend your discretionary dollars.

Next: Nudging Yourself

Previous: Low Fixed Costs

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