The following is a guest post by Jon who blogs at Money Smart Guides, a personal finance blog whose goal is to help you get out of debt and start investing for your future. If you’d like to guest post on Money Q&A, be sure to check out the site’s Guest Posting Guidelines.
We all know that small expenses add up over time. This concept has been popularized and tagged as “the latte factor” by various experts and authors. The idea goes, if you cut the spending on smaller items, not only will it be easy, but you can reap a large amount of savings over time.
While the potential for saving money is not in doubt, many people solely focus on the small expenses and forget about the big ones, when in fact, the big ones can help you learn how to save a ton of money. Here is why you should focus first on the big expenses first, and then concentrate on the small ones.
How to Save a Ton Of Money on Large Purchases
Bigger Potential Savings Mean Bigger Impact
While cutting out a $3 coffee two days a week will add up to a nice $312 extra over the course of a year, if you focus on the big expenses in your life, you can easily save much more than this.
For example, I shop my insurance needs every year or two. At first, I was skeptical that I could save money doing this. After all, I thought the company I was with for over 10 years valued me and offered me their best rates.
Boy was I mistaken. It turns out many insurance companies use the practice of price optimization. What this means is that those who don’t shop around for insurance coverage pay for those that do. How does this work?
At its most basic, let’s say you are with ABC Insurance Company. I shop around and get a quote from ABC Insurance. They offer me an incredible deal to come on board. This deal might even cost them a few dollars. How do they overcome this? They raise the rates on their long-term (loyal) customers, who happen to be you.
If you don’t shop around for insurance coverage, most likely you are costing yourself money. When I switched companies the other year, I ended up saving $200 a year
Now you might notice that $200 savings is less than the $312 I could save by skipping coffee twice a week. And mathematically, you would be right. But here is what most people don’t take into account.
The issue of time. To shop around for insurance coverage takes me 15 minutes to do the first step and then another 30 minutes to confirm the coverage will be the same as my current policy. In the end, I spent 45 minutes to save $200.
When it comes to coffee, I have to remember to not buy coffee twice a week for an entire year. On top of this, I have that little voice in my head. You know the one I am talking about. When you are tired and it tells you “just today, one coffee. You can skip it tomorrow”.
When tomorrow rolls around, you are tempted again. I can guarantee I am going to give in to the temptation a few times. If I give in just one every other week, my $312 savings has dropped to $234.
This is why you need to focus on the big expenses. In most cases, you can take a few minutes once and lock in the savings. With the smaller expenses, this is not the case. You have to actively save on a regular basis.
Big Places To Save
So what are the bigger expenses you have? In general, they include:
Cutting all of these does not involve a great deal of effort. I’ve already discussed why you should shop around for insurance coverage. The key to remember when doing so is to compare apples to apples. You may get what looks like a great quote but it has lower policy coverages. Go line by line to confirm you will have the same (or better) coverage. Also look into bundling coverage as well for greater savings.
When it comes to your mortgage you can look to refinance your mortgage to save some money. With interest rates still low, you can save a good amount of money if your current interest rate is 5% or higher. The catch is to make sure you are really saving money.
This means don’t just look at the new lower monthly payment, but look at the overall cost of the loan. Sometimes your monthly payment is less because you made the term of the loan longer. This results in more interest over time.
Of course, there are other options for cutting this monthly expense as well. You might bring in a roommate or even downsize to a smaller, more affordable home for example.
When it comes to rent, things get trickier. Your best shot is to be a great tenant. This will give you leverage when your landlord tries to raise the rent. They will have to think twice if an extra $25 per month is worth the hassle of finding a new tenant and risk having them not be as good as you.
I know this was the case for me. I ended up keeping my tenants rent the same because I never had any issues with her. No headaches meant more to me than an extra $300 a year.
To cut your taxes, simply contribute to your 401k retirement plan or a flexible spending or health savings account. In these cases, the money is taken pre-tax, meaning there is less money that is getting taxed, which saves you money.
In addition to these, you can also pay attention to your investments and have an investment plan. Invest in index funds as they throw off fewer capital gains, which you get taxed on.
Lastly, you can tie this one into your home from above. Maybe it makes sense to move to a smaller house and to an area where real estate taxes are cheaper.
Some reading this might even put groceries, cable or cell phones in this category as well. I personally consider these to be smaller expenses and talk about them in detail below.
Ideally, you will sit down with your budget and break out the big expenses from the small expenses. From there, you can start working on cutting the big ones.
All you have to do is realize the potential savings and do a little bit of thinking to determine your best options for saving money. Then you can take the initiative to lower these costs and start saving some money!
But Don’t Forget About The Small Expenses
Of course, you shouldn’t just ignore the smaller expenses as they do add up as well. While some will require an ongoing commitment to cut, like coffee, others can be cut just by making a little effort every few months.
For example, calling your cable company can have you reduce that bill for six months to a year (or you can just cut the cord and be done with them). Along the same lines, reviewing your cell phone plan could have you change it to one that better fits your needs and as a result, see you saving money each month. Lastly, being smart when it comes to grocery shopping can save you money here are well.
The idea is to not limit yourself to just large expenses or small expenses. Take a holistic approach when cutting your expenses. When you do this, you can easily and in many cases drastically reduce your monthly expenses to the point where you can save a nice chunk of money each month and be on the journey to financial freedom.
Author Bio: Jon blogs at Money Smart Guides, a personal finance blog whose goal is to help you get out of debt and start investing for your future.