Friday, May 23, 2014

Budget Reduction: Fixed Cost Edition

Photo credit: Pat Pitchaya via

Budget discussions tend to be quite harsh on coffee runs, dining and movies but perhaps not harsh enough on cutting our monthly expenses. 

Similar to a business, you have both fixed and variable expenses. The definition of a fixed cost for the purposes of this post is a cost that is relatively stable in price and there is little change month to month based on daily decisions. Being stable in price could either be a price that is fixed to the cent like a phone bill or an expense that is relatively similar month to month such as your water bill. Unless you decide to stop showering or start taking dramatically more baths, your water bill is not going to change much and therefore does not take much effort to maintain. Once you make a decision to lower one of your fixed costs, your decision persists for months to come.

Unlike fixed costs, variable costs require consistent willpower. Every single day, throughout the whole day, you have opportunities to spend money. Every day you have to decide not to buy that nail polish you walked by or cute dress in the window display and if you do not adhere to your budget, those costs can be wildly variable.

It is next to impossible to get ahead by only reducing your variable costs. Huge cost bombs take out our cash on a monthly basis, even before we make the decision about whether or not to buy those concert tickets. No wonder you may feel like your pay check has been spent before it comes in. However, regularly reviewing your fixed costs is a virtuous approach to finding yourself some money. The lower your fixed costs, the more money you will have left to go on that date night. Plus, this exercise is helpful for determining the optimal size for your emergency fund (which is another post to come). 

Below is a list of fixed costs. Click on the link for more commentary on how to reduce them (or get more value out of them.)

This should be a fixed cost that you are committed to and hopefully this is the destination for a  strong percentage of your money.

You have to live somewhere and there are going to be monthly costs associated with it.

If you rent, you have your rent plus renter’s insurance. Seriously get renter’s insurance. When I lived in an apartment by adding in renter’s insurance my payment actually decreased because of the bundle. It is cheap and you can really find yourself in a bind if you don’t. 

If debt is piling and you are not saving, maybe you need to move to a cheaper place. I tend to refer to apartments when I talk about renting, but you can rent houses or duplexes or all kinds of things. If you can tolerate it (and I couldn’t), get a roommate and you can really reduce this monthly load.

*If you purchased real estate, unless you just have a ton of cash or already paid off your house, you have your mortgage. Additionally, home insurance, property taxes and possibly private mortgage insurance (PMI) are probably paid with your mortgage.

Try to be aware of what is going on with your property taxes and dispute them if they are too high. Be aware of when you will meet the 20% equity to home value ratio because at that point you can contact your mortgage lender and request that the PMI requirement be dropped. If your set up is such that you could get a rent out a room or something, that is a great way to couple a monthly expense with some monthly income.

Basic primitive survival involved water, food and shelter. In modern day society you can add transportation to the list.

Car payments: Living in an urban setting is an amazing opportunity to avoid purchasing a car. However, sometimes you really do need a car to get to your higher paying job. A lot of people do not have the cash to buy a vehicle outright. Or perhaps they’d rather keep the money in investments and take advantage of some of the 0% interest deals that those car dealers love to yap about on the radio. There is a lot to be said about purchasing a vehicle and I plan on making a post later about it later. For this post, just keep in mind that the money that goes toward that payment is not going toward investments.

Auto insurance: A concept that does not get thrown out there often is the concept of being self-insured. Of course you want to comply with laws and purchase liability insurance but you can really save a lot of money by avoiding those expensive full coverage premiums. With that said, you are not self-insured if you cannot afford to replace your vehicle. The cheaper the vehicle, the easier it is to be self-insured and save that insurance money. This was my parents-in-law’s philosophy and really I love it. My husband and I have been married almost four years and we could have bought a third car with the money we saved.

Fuel costs: As you make decisions about what vehicle to drive, where to live, job opportunities or even embarking in a hobby, figure in the effect those decisions have on your transportation costs. You pretty much have to pay what the gas station charges and if it gets expensive you still need to travel to work no matter how hard you try to cut your expenses.  not as if you can just stop traveling to work. those basic places you travel, such as work besides investing in a different vehicle with a different fuel like compressed natural gas (CNG), you just have to pay the price. You may still decide to move forward, but it’s important to be aware of what it is really costing you. Whatever your fuel, there is a cost.

Tolls: Why there never seems to be enough money from existing taxes to pay for roads, I don’t know. I hate toll roads but both my husband and I use one every work day. If you pay a toll on a regular basis, count that in as fixed cost.

Parking: Use the same concept of tolls if you are in a situation where you regularly have to pay for parking.

Between health insurance, flexible spending accounts and medical savings accounts, you probably incur some regular expense.

*Health Insurance: This is just a terrible topic, especially since the passage of the “Affordable” health care act that raised health insurance costs for everyone. As you consider different careers and job opportunities, health insurance will be an increasingly critical factor.

*Health Flexible Spending Account savings: The advantage of money going into this account is that it reduces your taxable income. However, that is money consistently coming out of your pay check. Try to find that balance of maximizing tax savings while not overshooting. It is a use it or lose it situation and if you end up spending it on a bunch of random, not really necessary, expenses, that is still wasting your money.

*Medical Spending Account: This account also reduces your taxable income. 

Insurance (other than home, auto or health)
Whether it is long-term disability insurance or life insurance, insurance is very boring to talk about and an even less thrilling way to spend your money. Such is life. You need it. To an extent. When you consider what kind of coverage and for how much, follow financial experts that are not trying to sell you insurance. Shop around. You may find a deal through your work or maybe some trade organization you are involved with e.g. Geocare for people in the oil and gas industry. Consider the details of the plan and reputation of the company, not just the price.

Help our planet and lower your monthly costs.

Whether you have student loans, medical loans, credit card debt or some other form of debt, it is crucial to have a strategy for paying it off. The sum of your minimum payments is your baseline debt fixed cost. However you should absolutely pay more than the minimum.

Charitable Giving
There are starving children in Africa, kids being sold into slavery and diseases cutting short people’s lives. That is fantastic if you want to make some monthly commitments to a worthy cause. Just make sure you add it to your budget!

Technology is awesome. But it is expensive. Fortunately, there are ways to get just as much value for less money out each month.

*Phone: Sometimes I feel like the only person with a VirginMobil plan but seriously I don’t understand why everyone is not doing it. I paid $100 for a smart phone that has space for plenty of apps and a decent camera and I pay $45/mth for unlimited data and text and 1500 minutes. It only took a couple months of savings from my monthly plan before I made up for the investment of paying for the phone.

*TV: There are so many options to stream shows that you may enjoy your tv set up more with those instead of cable. 

*Internet: As you select which plan is best for you, just remember that if you chose a lower cost option, that lowers your total fixed cost expenses

Beauty & Fitness
There are certainly a lot of purchases to be made in this category. If you want to buy more work-out clothes, maybe you could make an adjustment to some payments in this category.

Gym memberships: The good old gym membership. Do you go to the gym? That isn’t the only way to raise a sweat so you don’t need to be ashamed if your answer is no. It may not be as motivating, but depending on how much money you have to work with, really consider taking advantage of that small gym at your apartment or at work. Perhaps you could invest in some at-home equipment. You could get some at a garage sale or on Craig’s List for cheap. Another option is to buy a groupon for different exercise classes to keep your workouts interesting.

Spa memberships: Massages are a girl’s best friend. There are many health benefits and maybe you want your monthly massage. I know I do. But if you are paying for a spa membership to save money on massages that you end up not booking, let that membership go.

Tanning plans: Be wary of those tanning contracts my friend. We all have heard about the dangers of tanning beds to our health, but I’m hear to warn you of the harmful effects on your wallet. Think about how much you are paying in yourself and get real with yourself – is it worth it?

Numerous magazines, services and even some video games require a paid subscription. If you use the subscription often, by all means keep it. But if not, fight the urge to be too lazy to cancel. Save your money; get it cancelled.

What have you cut or plan to cut? What are some of the monthly charges you get the most value from?

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