Here at SnoQap, your favorite financial blog (it's okay, we know--thank you :D), we talk a lot about different topics like how to pick a killer stock, how to trade options, and what Brexit really means, but there's another portion of your financial life that we would be remiss if we didn't talk about the other part of your personal income statement: expenses.
Investing is great--doing well at it is even better--but what about cutting out unnecessary expenses? Everyone knows the old saying, "a penny saved is a penny earned," but, for me, it never really hit home until I went to the grocery store early in this past semester. At the time, I was losing money in my (tiny) portfolio and pretty annoyed that I was ruining what I worked so hard for in the summer. As I was tossing granola bars into my cart, I noticed that a coupon dispenser had a coupon for a different brand of bar that was essentially the same. After much deliberation, I decided to take the coupon and the other brand, then it hit me: by making a small change in my shopping habits, I was able to offset the losses of the past week; so why not do it all the time?
You've probably heard of the show Extreme Couponing, where they show people who are so adept at using sales and coupons to their advantage that they end up walking away with cart full of groceries, having not spent a penny. Is this an extreme? Yes, but it proves a good point: if you devote enough time to your overall financial health, you will be far better off than if you only focus on your investments.
In life, the most prevalent expenses are your home, transportation, food, miscellaneous expenses (entertainment, clothes, etc.), and unexpected costs. Since the characters in my head make most things more fun, let's talk about my good friend James. James is a 20-something with a steady job that pays him a total of $90,000 a year (with all parts of his compensation considered). He only eats organic food, loves driving around in his Mercedes G-Class (more aptly nicknamed "G-Wagon"), and "can't drink enough" pumpkin spice lattes...oh, and he hates long walks on the beach. James spends a lot of time wondering "where the hell did all of my money go," so he wants to plug some of the holes in his wallet. Without further ado, let's get started.
1.Make a Budget
As we mentioned, James' full compensation package is $90,000, sounds pretty good, right? Sorta. While James may earn $90,000 each year in gross income, he only earns about $55,000 after taxes, which is known as net income. Put another way, James only "takes home" $55,000 each year. After finding his net income, he needs to figure out what he is actually using it on. Out of that $55,000, James pays $20,000 for his apartment, $14,000 for his G-Wagon (which includes loan payments and insurance), and $2,500 for his health insurance. These expenses are his fixed costs, things that he will have to pay for year in and year out. Then there are the expenses like food, gasoline, toothpaste, and others, that change from month to month and year to year. For nearly all of them, James won't know how much he'll pay until he buys them, these are known as his variable costs, as they vary each time.
While this is an intensive process, the easiest way to figure out what you will pay in the future is to figure out what you have spent in the past and assume that conditions will stay mostly the same. One way to do this is to look through bank and credit card statements and separate expenses into different categories like: books, gas, groceries, coffee, etc. Then organize these expenses into needs and wants: you need gasoline to get to work, but you want coffee. Now that James has a rough estimate of $4,000 in expenses each month, what does he do?
2.Track Your Big Expenses
The easy answer is for James to say "my big expenses are my car and my apartment." While he is not wrong, he may be missing out on high-frequency expenses, like a pumpkin spice latte every single morning before work. Sure, "it's only $5," but over a week he spends $25 (or about $1,250 a year). Taking into account all of his small, miscellaneous expenses, this could be thousands more every single year that is essentially going unnoticed. They go unnoticed because James spends most of his time complaining about his car; the big, flashy G-Wagon is a huge dent to his budget at $1,166 per month.
We talked about James' love for organic foods, a preference that take a toll on his wallet; organic foods typically cost 45% more than their non-organic counterparts. Just like picking the other brand of granola bar, James can decide which organic foods are most important to him and which ones he's willing to leave behind in favor of saving a few bucks. His pumpkin spice latte can also fall onto the chopping block: investing in an espresso machine may be expensive in the beginning, but making it at home three times a week (and splashing in a bit of pumpkin spice creamer) would save James $15 every week. (I'll refrain from the blasphemy of suggesting that he should get rid of his G-Wagon, I'm sure the PSL was almost too much for you to handle already).
4.Become the Coupon King
THEY ARE EVERYWHERE. Newspapers, emails, mailers, and so many more. Almost any thing that can be bought can be couponed. If you shop at a certain supermarket a lot, try downloading their app--it may lead to many useful coupons along the way! It would also be wise to look into their coupon policy to see if they allow for doubling, which means they'll match your coupon up to a certain value.
So, now James is on his way to putting a cap on his PSL glutton, his organic food kick, and, hopefully, his obsession with over-sized, overpriced cars (maybe you will, too). But could he have done it any easier? As an added bonus, there are a few tools that I have found to be very useful over the years. My favorite thing about them is that they take very little effort to use and don't force you into a strict set of rules. Instead, you use them to augment your life.
- Mint: This is a clever little app that does everything. Plug in your bank account, credit card, and even your loans (here's looking at you, fellow college kids), and will track and organize all of your expenses. You put in how much you want to spend in each category, and it will alert you when you get close to the limit. Cool, huh?
- Gas Buddy: I don't fill-up without it. It uses your location to list out all of the gas prices in your area so that you can find the cheapest one. Best of all, it tells you when it is a cash-only price, so you don't feel like running into traffic when you accidentally overpay.
- Ibotta: This one is new, but I love it. Search for syrup and it gives you all the coupons for variety of brands. Scan that 2 gallon jug of Aunt Jemima and it will show you if there's a coupon. If you forget to be proactive about it, you can even scan your receipt to find things you missed.
I hope this little tutorial helps you take a bit of the stress off of your portfolio and focuses it on getting your own life in order first! Happy saving, friends.