4. Decreasing Expense

4. Decreasing Expense

We learned about the Monthly Cashflow Analysis in the previous lesson, which revolves around this straightforward equation.

Total Income - Total Expense = Profit

You can increase the profit by either increasing your income or decreasing your expense. In this lesson, we will learn how to decrease your expense.

I would love to bore you with why decreasing your expenses is crucial. But I'll save that till the end of this post and get right to the ways you can save money today. However, I highly recommend reading about why you should cut down, so be sure to check it out.

1. Monitor your monthly expenses

The first step to strategising how to reduce your expenses is to consistently do the Monthly Cashflow Analysis. If you follow it religiously, it will help you budget your free-spending amount per month appropriately, thus keeping your expenses within your means. Otherwise, you have no idea how much money is too expensive for you. If your free-spending budget is $200 a month, spending all of it on a single night out would be too expensive. However, if your free-spending budget is $2000, spending $200 in one night is acceptable.

2. Downsize mortgage/housing or live completely free

The single most considerable expense for a household is the housing expense. I am going to state it as plain and straightforward as possible. The person who can bite the bullet to suffer now and reduce the cost of housing will come out a huge winner in the future.

If you are young and single without any dependents that you need to support financially, this is your golden opportunity to win big in life. Rent a house or a flat with multiple rooms. You can live in the smaller and less attractive room and rent out the other rooms. You should be able to charge your roommates enough to completely cover the cost of your small room and live free. There is no need to worry about not being able to find roommates. Most big cities worldwide suffer from the housing crisis, so finding roommates should not be a problem. In the worst-case scenario, you are paying a fair portion of the rent, which is still a lot cheaper than living by yourself.

Living with roommates is already too late if you are older and already have a family to support. The only option is to downsize the house to lower your mortgage. However, being the loving parent you are, it wouldn't be easy to do this either. It would be best if you took a moment to write down all the essential requirements for an ideal house for you and your family.

  • Distance to school
  • Distance to amenities
  • Neighbourhood
  • Number of rooms and their sizes
  • Backyard
  • etc.

You should assess where you can make the sacrifices among the listed requirements—although challenging, downsizing now to benefit more in the future would probably be a good idea. There is no better timing than now to reduce your mortgage loan and take charge of your financial situation.

3. Reduce your car expense

  • Find ways to get rid of your car entirely. Relocate your home closer to your work within walking distance. If not, move nearer to public transportation lines.
  • If you have young kids and a car is an absolute necessity, trade-in your expensive car for a much cheaper one.
  • If you use your car less often in certain months of the year, list it on the car-sharing app to earn extra income. Of course, your vehicle would have to be cheap to make this worthwhile.

4. Reduce food and groceries

Above housing and car, expenses are the two most significant expenses for an average household. So if you have already reduced a substantial amount from them, you are already well on your way to building your wealth the right way. Saving even more money on food and groceries is the extra mile you can take on if you wish to.

  • Take this opportunity to eat healthy. You'd be surprised to find out that healthy meals are much cheaper than not.
  • Buy home supplies like laundry detergent, toothpaste, toilet papers, cleaning products, etc., at a wholesale store at near half the regular retail price.

But why try so hard?

Reason #1, you want to start investing in things that will compound over a long period, and you want to start that today. Paying for a big mortgage on one single house for the next 30 years will put a hard upper limit on how much wealth you can accumulate in your lifetime, and you will only ever be as rich as owning a single house. On the other hand, over many years, compounded investments will inevitably outgrow the worth of one house and continuously make you richer.

Reason #2, if you have almost nothing after paying all the monthly expenses, this is a considerable risk. This situation is equivalent to saying, "everything has to be working exactly the same way every month; otherwise, we might not make the next bill payments." If something goes wrong and your income falls short or your expenses shoot up, there is nothing you can do about this other than borrow money from credit cards. Which, of course, is digging an even bigger hole for yourself.

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