Cutting Costs
In This Chapter
- How we spend money
- Looking at where you live
- Trimming transportation costs
- Cutting back on food, clothing, and entertainment
- Saving on insurance
You read about the importance of making and sticking to a budget in Chapter 3. Hopefully, you’re now working within a budget that makes sense for your financial framework.
If you’ve gotten a raise at work, it can be tempting to relax your budget. Maybe you’re thinking you could afford a higher car payment and are considering trading in your older vehicle. Or perhaps you splurged on that fun cruise that seemed like a bargain.
In this part of the book, you learn about different ways to save. More importantly, though, you learn why saving money is so important and how even small savings can add up.
If you’re living within a budget, good for you. But if your budget has gone by the wayside or you’re having trouble sticking to it, it’s time for a refresher course. Chances are you can find a lot of ways to cut costs and live more frugally. Making some sacrifices now can go a long way toward ensuring a successful financial future and can give you a lot more options and freedom in how you live.
Spending in America
Americans spend a lot of money on items and services most other people in the world live quite well without. For example, in 2014, we spent $2.8 billion on Halloween candy. Yes, Halloween candy. We hand over about $120 billion a year for fast food, and the average American spends $400 a year gambling on lottery tickets, on sporting events, in casinos, and so forth.
Money Pit
Smoking and excessive use of alcohol are not only bad for your health, they’re also bad for your wallet. On average, Americans who earn $19,000 or less a year spend nearly $500 on alcohol and tobacco. Those in the $36,000 to $59,000 income group spend $733, and those earning more than $94,000 spend $1,260.
There are some things—taxes for instance—for which you must pay what you’re required to pay. And you need a place to live, a way to get around, and food to eat every day. If you have debt, paying it down is an additional expense, which you read about in Chapter 8.
In America, our biggest chunks of income go to the following, in order:
- Housing
- Transportation
- Food
- Personal insurance and pension
- Health care
- Entertainment
- Clothing
- Charitable contributions
Let’s take a look at some of these areas and ways you might save some money.
The cost of housing includes more than your rent or mortgage. Energy expenses, property taxes, utility bills, maintenance fees, insurance, and other expenditures also count toward the cost of housing. All those dollars add up fast, which is why on average Americans spend one third of what they earn on housing.
If you’re renting a house or apartment, you can cut costs by finding some roommates or moving to a place with a lower rent or mortgage. If you’re thinking about buying a house, you learn a lot about that in Chapter 16. For now, let’s look at some ways you can save on your housing costs.
Utilities
If you pay the utility bills where you live, you’re probably already aware that keeping your house or apartment comfortable can be costly. Utilities are increasingly expensive, but you can reduce some of those costs:
Unplug Electrical devices consume power even when they’re not in use. Unplugging small appliances and devices when you’re not using them can save you money.
Change your lightbulbs If you haven’t updated your lightbulbs to CFLs or LEDs yet, consider doing so. They’re more expensive up front, but they begin to save you money quickly.
Check your water heater Heating water accounts for more than 10 percent of energy costs in most homes. If the temperature on your water heater is set higher than 130°F, you’re spending more than you need to. Turn down your heater to 125°F or 130°F, and wrap a water heater blanket around it to avoid losing heat. Your water will still be plenty warm, and you’ll save money.
Air seal your home Caulking and weather-stripping help reduce the amount of air that flows in and out of your home and can reduce your energy costs.
Pocket Change
The U.S. Department of Energy provides a do-it-yourself tutorial for air sealing your home at energy.gov/energysaver/air-sealing-your-home.
Go higher in summer and lower in winter Turning up your air conditioner setting and turning down your heat setting just a couple degrees can lower your heating and cooling bills.
Think about your showers According to the Environmental Protection Agency (EPA), Americans use more than 1 trillion gallons of water every year just for showers, with the average shower lasting 8 minutes. If you cut your shower time by 2 minutes and install an EPA-approved WaterSense showerhead (available at home centers), you’ll not only do your part for the environment but save money as well.
TV, Internet, and Phone
If it feels like you’re spending too much on TV, internet, and phone services, you’re not alone. Mintel, a market research firm, reported that the average household paid $165 a month for these services in 2015.
Millennials and some others have started finding ways around these high costs by giving up cable TV and using streaming boxes or a video service like Hulu. Others have purchased an antenna, which can be had for around $80. Cutting or drastically reducing your cable bill can save you serious money.
Phone service also is expensive, so it pays to shop around for the best plan you can find. And remember, you really can still live with your current smartphone after the new-and-improved version comes out.
Americans pay more for internet than their international peers and often get slower service in return. Compare plans before you agree to an internet provider, and look for bundling options that may save you some money, at least for an initial period.
Insurance and Taxes
If you own a home and think your taxes are too high, consider asking for a home reassessment. To get a reassessment, contact your county’s tax collector’s office, or the tax assessor’s office, and request a reassessment.
Also ask the real estate agent who sold you your house to provide you with information about comparable sales in your area. If your house is assessed at higher than what other houses have sold for, you might stand a good chance of having your assessment lowered, which would mean your property taxes would be lowered, too.
A realtor with whom you’ve done business often will complete the form for you and even represent you if your county or state requires a hearing to consider the reassessment request. Don’t be afraid to ask.
In addition, call your homeowner’s insurance company and ask if there’s a way you can lower your costs. If you don’t have your home and car insurance with the same company, ask if bundling the coverages could lower your rate. Read your homeowner’s policy carefully to see if you might be overinsured.
The Insurance Information Institute offers free information, including “Twelve Ways to Lower Your Homeowners Insurance Costs,” at iii.org.
Refinancing Your Mortgage
Refinancing your mortgage essentially means you replace your current mortgage with one that has a lower rate. Lenders will tell you it makes sense to refinance your current mortgage when rates have fallen 1.5 percent or more below what you’re currently paying. If that applies to your mortgage and you plan to stay in your home for a period of time, you might want to refinance.
Some lenders claim it makes sense to refinance when rates are less than 1 percent below your current rate, but depending on closing costs, the length of time you’re planning to stay in your home, and other factors, that’s questionable.
When you’re thinking of refinancing, ask the lending agent to run the numbers for you, considering these factors:
- The interest rate to be charged on the loan
- Closing costs
- How long you will be in the house
The numbers should tell you what’s best for your situation.
Transportation Costs
One thing is for certain: it’s expensive to own and maintain a car. (You read much more about that in Chapter 15.) If you already own a car, you can save money by ensuring you take care of it properly to avoid big repair bills. If you don’t own a car and are thinking about buying one, consider how much you’ll need to drive it and why.
Dollars and Sense
Get in the habit of checking your tire pressure once a month and keeping your tires inflated to the maximum recommended pounds per square inch (PSI). Keeping your tires fully inflated can improve your gas mileage.
If you live in an area served by Uber or another car service, or that has a good public transportation system, you might be able to get away without a car. Could you walk or bike to work, or join a carpool and give the drivers some gas money in exchange for your ride? If you need a vehicle for a trip or another reason, you could always rent one.
Food Costs
The easiest way to save money on food is to buy and cook your own meals and eat at home instead of going out or getting takeout. This is generally healthier, too. You also can save money—a lot of money—by packing your lunch to take to work. Even spending $7 or $8 for lunch three times a week adds up to more than $1,000 a year. That’s money that would be much better invested or saved.
Meal delivery plans like Blue Apron or Green Chef are fun and save you the trouble of running to the grocery store to shop for dinner, but the meals typically work out to between $10 and $13 for each person—far more than the U.S. Department of Agriculture’s Cost of Food Analysis that set the cost of home-prepared meals at between $1.80 and $3.75 each.
Look for discount stores such as Aldi in your area, shop your local farmers’ markets when they’re in season, and use coupons to save more on your food bills.
Dollars and Sense
Use an app such as SnipSnap (snipsnap.it) to scan coupons to your smartphone, eliminating the need to clip and carry paper ones with you. Stores such as Target and Giant Foods let you download a loyalty program app that gives you points for dollars spent to be used for discounts on gas, prizes, or other rewards.
Personal Insurance and Pension Costs
Personal insurance and pension costs are mostly the Social Security payments that are deducted from your paycheck. More than three quarters of all U.S. households contribute to Social Security, on average $5,275 a year. Remember that you only pay half of your Social Security contribution—your employer pays the other half.
There’s nothing you can do about your Social Security contribution; it’s got to be paid.
If, however, you have life insurance or other personal insurance, you might be able to lower your premiums. Look over your policy carefully, and talk to your insurance provider.
Health-Care Costs
You read a lot about health-care costs in Chapter 10, so we’ll just remind you to be thankful if you have a job that provides health-care benefits. If your job doesn’t provide benefits or you’re not working, you’ll need to do some research on how to get the policy you need at the best rate.
If you haven’t turned 26 yet, you can be covered on your parents’ health-care plan—thank you, President Obama. If you have to buy your own insurance, check out the federal marketplace at HealthCare.gov and compare what you can get there with some private plans. A high-deductible plan may make sense if you’re young and don’t have any medical conditions.
Entertainment Costs
Nobody is going to argue that relaxation is important or that entertainment costs are not a legitimate spending item in your budget. What we will argue is that cutting costs on entertainment that isn’t all that great is smart because you save money and have funds for the things you really want to do.
Sure, you can go to happy hour three nights a week after work, but maybe it would be better to save that money for a spring vacation in a couple years. Making a few snacks and asking your friends to bring their favorite beverages to your apartment after work instead could save you a lot of money you’ll have later for something you really want or need.
If you’re paying a lot for a gym membership, consider whether you’re using it to its full value. Exercising outdoors when it’s feasible is fun and a lot less expensive.
If you enjoy travel, look into getting credit cards that reward you with free flights or hotel stays, and join a travel website that sends you reduced rate deals on trips, such as these:
- Travelzoo (travelzoo.com)
- Travelocity (travelocity.com)
- Kayak (kayak.com)
Also check out some apps designed to save you money on travel. Here are a few to look at:
- LoungeBuddy (loungebuddy.com)
- ExpertFlyer (expertflyer.com)
- Priority Pass (prioritypass.com)
Clothing Costs
Most of us have clothes in our closets we haven’t worn for months—maybe longer. And yet we keep buying more. The average American spends almost $1,500 a year on clothes—some of which never make it out of the house.
If you think you’re spending too much on clothing, consider the following suggestions.
Buy used Look for an upscale secondhand shop in your area, and check it out. You may be able to find designer clothing at a fraction of the cost you’d pay for it new.
Buy off-season The best time to buy a winter coat or a pair of boots is in late February. A swimsuit or sundress? Late August. Consider what you’ll need for the next season, and take advantage of low prices.
Beware of outlet shopping Outlet shopping might be cheap, but brand-name clothing sometimes is made specifically for outlets and is of a lower quality than what you’d get in a department store. You’re probably better off to shop department store sales for clothes you’ll wear often and save the outlet shopping for an occasional trendy item you’ll wear occasionally.
Stick with the basics Buy basic items you can change up with accessories, limiting the amount of trendy clothing you’ll only wear a couple times.
Pocket Change
A fun way to mix up your wardrobe is to do a clothing swap with friends. Turn your living room into an indoor yard sale by inviting friends to bring gently used clothing and accessories they no longer want and exchanging them for something “new.”
Charitable Contributions
Most people agree that supporting causes you believe in is a good thing to do. But how much should you give? Many churches urge members to tithe—or contribute 10 percent of their income. On average, according to the Charities Review Council, American households contribute 3.2 percent of incomes to charities, or about $1,620 a year.
If you’re just getting started financially and trying to save some money, consider donating your time and talents instead of your money to causes you support. That might mean volunteering at a shelter for the homeless or painting for Habitat for Humanity.
There’s no shortage of need and many ways you can help.
The Least You Need to Know
- Some expenses you must pay, but there are many ways to cut back on your spending.
- Americans spend the largest percentages of their incomes on housing, transportation, food, personal insurance and pension, health care, entertainment, clothing, and charitable giving.
- An effective way to cut household spending is to get control of your utility bills.
- Cutting spending at this stage of your life gives you more money to save and more options for your future.