Cost Cutting – Don’t Dismiss the Necessary Evil for Your Personal Finances

Yep I Said It – Time to Cost Cut

Most established Corporations at least every year (if not more than that) challenge their cost structure with a formal process and make necessary cost cuts. Cost cutting is not always fun but without a vigilant eye on your costs – you may be just giving away some of your money or you may be spending it on the wrong things! Not good!

This post will give some perspective on why and how corporations cut cost and provide a template/ideas for your personal finance cost cutting adventure.

If you have not already read my intro post – I encourage you to read it for context: The Framework: Your Life as a Profit and Loss Statement and Balance Sheet

Why Do It

Two reasons:

First, while you may not like to admit it – it is easier to cut costs than grow Revenue if your goal is to generate more profit/savings for your personal Profit and Loss Statement. The ease is the same for both corporations and your personal finances which is why it is the go to personal finance advice. Your business is missing plan? No travel expenses! Your personal finances aren’t allowing you to save enough? No more lattes!!

Second, expenses are a reflection of the priority of the company or your personal finances. At some point you need to make sure your expenses are going towards your strategy… otherwise you’ll likely never accomplish anything in your financial life unless you are already really really rich. Your company needs more cash flow to invest in fending off that new tech company down the street? Cut your expenses in XYZ department, offshore a department, or pay to automate a process. Need to save for a house for your personal finances? No more eating out!

In big corporations – there is always a push on cost. Why? Business evolves, technology evolves, resources needs increase, there is only a finite amount of capital, and competition comes into disrupt typically with a lower cost to serve or a different (superior) offering. It’s called capitalism and innovation and eventually all companies in their growth to curve run into it…. it just takes longer for some than others.

What about your family? Are there kids on the way or planned? Are you trying to save for a house or a remodel? Are your wages not going up like you hoped? Lost a job or are in a lower paying job? Sound like a corporation yet??

Ok How Do The Big Boys and Girls do it

So how do corporations typically go at it? From an insider view I can tell you it always a focused effort. One year it is non-op, next year consulting spend, or it’s isolated to business units or lines not performing. Trying to boil the ocean won’t get you much and I have seen the concentrated efforts be the best focus. The other reason for the focused effort is cost cutting takes time and a corporation can’t take their eye off of growing – and you shouldn’t either! But you should have a cost cutting plan!

A Template for Your Personal Finance Cost Cutting

Here is my blue print I have been following that has served me well.

Fixed Costs

1. Housing costs – challenged annually during December to come up with a plan in the new year. I look at current mortgage rates, my home equity, and the amount I am paying a month. My goal has always been to have the lowest payment possible which is why I have stuck with a 30 year mortgage despite being able to pay more at times. I want options! At a bare minimum I tinker with the math each year to see how a large payment on principle may be able to lower my overall payment if we were to refinance. I’ll have a separate post on this later.
2. Home owners association dues if you own – I reassess my strategy here once a year as well typically when taxes are due in Q3. These costs are very hard to pull down. I have focused my energy on making sure I am paying as little as possible…. avoiding Credit Card mark up “convenience” fees (unless I can turn a profit with my 2% back card… sometimes you can if there is a flat fee), paying early when a discount arrives, and begging my HOA for lower dues or discounts for paying early.
3. Property taxes and home owners insurance if you own- After challenging my mortgage company this last year I made the switch and now pay my property taxes directly vs having the mortgage company pay it. When I did the math I was 1). Locking up capital (about two months worth of taxes) with the mortgage company I could have invested 2) total expenses in escrow divided by 12 was higher than the actual bill. Paying these directly lowered my fixed costs and I have now planned for the annual “bumps” to get this paid.
4. If you have kids – Daycare/School expenses. I reassess these during back to school season every year. These costs are very hard to pull down. I have focused my energy on making sure I am paying as little as possible…. avoiding Credit Card fees (unless I can turn a profit with my 2% back card), paying early when discount arrives, and making sure I don’t have any credits built up at the school. I pay a flat amount for breakfast/lunch every week and have found a spare $100 to $300 around every now and then. I started a Child Care dependent account at work that allows me to get $5k income tax free that has helped me lower the overall cost burden as well.
5. Core utilities – power, water, etc.. I call these guys once a year on my ride home from work. Power bill – I had rebates that have been offered to me and/or savings I could get for going onto new rate programs (nights/weekends plan)….. you laugh but I have saved good money here! Water…. I have yet to get savings on a water bill but they now take credit card – 2% cash back here we come!
6. Communications – mobile, internet, tv, and cable. I also call these guys once a year. I am now down to: $50/month for cable internet for a 4K TV, $12/month for Netflix, $8/month for Hulu, and $220/month for two mobile phones and service (includes paying for two apple phones). All are on my 2% cash back card…. I realized one was not this last year! I have knocked down my cable and cell phone bills down regularly for the past five years. Push push push for the best rate and threaten to leave!!! I was paying close to double these rates (excluding the phone payment) 3 years ago!! Why not pay off the phones early?? No benefit! It was actually cheaper to finance them!!
7. Insurance – I call these guys once a year typically in the spring when homeowners bill comes in. I do not recommend you skimp on insurance (I don’t) but I highly recommend you call your insurance agency and make sure you are getting all the discounts you can and that you are in a rate competitive plan. Some gurus suggest switching companies every few years but I have been just as successful negotiating with my carrier. There have been multiple innovations insurance recently – everything from discounts on prepay, tracking your driving habits, to rates moving. My insurance gives me a 5% discount if I pay early and doesn’t charge me a credit card fee….. that’s 7% off my insurance given my 2% cash back! Bam!

Variable costs

As a refresher Variable Costs from a personal finance perspective typically fall into the “everything else bucket”: food, entertainment, home expenses, dry cleaning, etc..

First things first – if you are not tracking these expenses at a category level – shame on you! It takes me less than 5 mins once every two weeks to categorize my expenses as they are all on credit cards. Do you think a corporation would be ok without knowing where there expenses are going? No they would not! And you shouldn’t accept that either! Just get it done… once a month is fine if you can’t do it every two weeks like me.

Second, I recommend you have a budget for “all of this other stuff” first and secondly a budget per category that makes this up (eg I have $1K/month to spend – that’s $500/month on food, $300/month on routine bills, and $200/month on all other stuff). IMPORTANT NOTE: Just like a corporation you need to set a spending threshold you want to hit so you hit your goals! Arguing with yourself over if you should spend more in one category than another plays back seat to having a total spend limit. Set a threshold first! Don’t justify your spending levels from the bottom up!

Third, I manage towards a rolling 6 month average of cost. It is August so my expenses for the last 6 months cover Feb through July and I focus on if my average spend is in line with my budget. If I am off in total I tend to focus on what category is trending up or breaking the budget. I tend to focus on “what new habit did I pick up that is driving me over budget?” “Can I get my 6 month spending average budget back in line?” Vs. getting upset at much I spent at Target.

The reality of a budget is you will likely go over it some months and hopefully under in some months…. if you average out you are doing a good job and you shouldn’t be hard on yourself.

In Summary

View cost cutting as a way to ensure your personal finance strategy is executing. You need to save money in the long term and you need a way to get there.

Challenge your fixed costs at least once a year – call and complain and asks for discounts! And then do it again next time you are in traffic! You will be surprised what the customer service reps can provide you insights on!

Define your savings goal first and back into what you can afford for your “everything else” expenses to be.

Manage towards an “everything else” expense number for everything going through your credit and debit cards….you will quickly go nuts if you try to hit this budget every month. Act like a corporation…. on track to miss a quarter? Stop traveling for a month. On track to over spend vs your 6 month average? Chill on that spending for a month!!