The Power of Cutting Expenses

Cutting expenses is the biggest tool in your toolbox for creating more room for financial freedom.

As you build strong budgeting habits, you're likely to be surprised by how much you may be spending in one area. You'll also notice how big some of those big ticket items are.

Cutting expenses is one of the most powerful things we can do to make ourselves financially independent. When we reduce our monthly expenses, in a way, we actually double our wealth. When we first heard this, we also thought it was a ridiculous notion, but it stands up to scrutiny.

By lowering our expenses, we're able to save more each month, so more money in the bank, right?. But we're also extending how far that savings can take us. By not needing as much cash each month to be happy, we can retire, take a break from working, or choose a more fulfilling (but lower paying) job with much less money, all because we need less money to be happy.

It's this flexibility that lowering our expenses gives us that gets us excited. Imagine being able to make huge life-changing decisions with security, knowing that you can not only survive, but be happy with much less spending each month. Cutting expenses is the most important, and first step to achieving independence.

What to cut first

Giving up luxuries is by no means easy. Perhaps paradoxically, the biggest opportunities to cut spending probably are in areas that won't affect your true happiness almost at all. We prefer to focus on expenses where the cheaper alternative is (1) much cheaper; and (2) brings virtually the same amount of happiness to one's life.

We also want to start with expenses where your psychology isn't working against you. Immediacy is a powerful motivator, so instead start with the expenses that are longer-term obligations. Put it this way: giving up that $3 gourmet pastry when it's right in front of you is much harder than giving up a $350/month car payment for what is essentially a utility.

The Big Two

For most people the two largest expenses are rent and car payment(s).

We'll get down to brass tax: your car payment is probably a complete cash bonfire. Even moderately expensive cars, say $15k, are not worth the cash for almost anyone. Not only are you paying interest on an asset that is losing value, the cheaper alternative (a $3k used car) provides almost identical utility. In an age where your smartphone and a dash mount can fill any "smart car" and entertainment functionality you can dream of, buying new fancy cars simply does not make any financial sense.

Buying a new car feels great. We've done it. But that novelty wears off fast. Three months later, and you're not going to care about the buttery-smooth handling as much as you'd like to have a few thousand more in the bank. Trust us.

The other one is rent. Rent is a bit trickier and there are a lot more parameters to consider. If we go back to our Philosophy of Money, we should be spending money on things that maximize happiness. With that in mind, choosing a place to live comes down to a few factors:

There's definitely a lot to consider, and depending on your situation you may not have many options. But there is one opportunity for some cooperation between these two big expenses: live close to work and ditch the car. Bike or walk to work and use Uber when you need to get a bit further. Not only will you probably be happier and wealthier, but healthier too. This works especially well if you work near a city center where you can walk or bike to get groceries, go out to eat, etc.

The Rest

For the rest of your expenses, we recommend combing through your regular monthly expenses and looking for easy opportunities. Below is a table of common expenses you may be able to cut and how to go about it, but at the end of the day, this takes some creativity. In general, focus on the larger, recurring expenses first.

Expense

Ways to Save

Cell Phone

Virtual carriers have gotten much better in recent years, and often 50% cheaper. See if MetroPCS, Cricket, Boost, or Google Fi cover your area.

Dining Out

Food is amazing, no doubt about it, but eating out is often less healthy and much more expensive. When you start a family, you simply won't be able to afford this. Get a good cookbook and start building cooking skills. In time you'll find you can make fantastic healthy food quickly and cheaply. Not only that, you may come to really enjoy it.

Medical

Saving money on medical expenses is tough, especially in the US. Our best advice: keep yourself healthy and save yourself some major bills in the future. Eat well, workout regularly, and keep up with regular doctor visits. Skipping the dentist to save a little dough now is just going to cost you much more later.

Furniture

Nice furniture is typically pretty expensive. However, used furniture is much cheaper (typically 50-70%!). Hunt local marketplaces like Craigslist and Facebook Marketplace to find what you need. You may need to wait a bit longer to find what you're looking for but you'll rarely be disappointed.