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No matter what your long-term financial goals are, the first step to achieving them is creating and managing a budget. With a budget in place, you’ll gain a better understanding of how you’re making and spending money, and with the right knowledge and discipline, you can reduce those budget items to free up more cash every month. With that cash, you can pay off your debts, save up for a vacation or big purchase, or even start planning for retirement.
But to get that extra cash, you need to be able to reduce your expenses in each of eight key expense areas.
Your Biggest Budget Items
For most consumers, these represent the biggest and most important budget items to get under control:
1. Rent (or mortgage payments). Your biggest budget item is probably your rent (or mortgage) payment; many financial experts suggest this can take up to 30 percent of your total budget. However, if you want to squirrel away more money for your savings or current financial goals, it’s better to settle for 20 percent or less. If you have a good landlord and a long history of consistent payments, you can consider asking for a lower rent payment. Otherwise, consider moving to a less expensive area of town, or downsizing the size of your home.
2. Insurance. Insurance is another major monthly cost, because there are so many subtypes to consider. If your health insurance isn’t at least partially provided by your employer, it can cost you hundreds of dollars a month, and most conventional forms of auto insurance lock you in at a high, consistent rate. You can reduce your costs here by switching to a provider that offers regular discounts, and by shopping around for more competitive rates.
3. Utilities. Utilities, including your electricity, natural gas, and water, can take up hundreds of dollars of your budget if you aren’t careful. Unfortunately, since these are necessities, it’s hard to eliminate them from your budget entirely. What you can do is invest in more energy-efficient installations, such as new windows or low-flow showerheads, and commit to energy saving practices that reduce your total usage.
4. Transportation. You need to get to work, get to the store, and run errands on occasion, and depending on your situation, your transportation costs can add up fast. Owning a car may seem like the best option, especially since it offers you more freedom, but the true cost of car ownership is higher than you think. If you want to cut costs here, it’s better to opt for public transportation, or bicycling whenever possible.
5. Groceries. Groceries can cost a few hundred dollars a month as well, especially if you have a family to feed. Make sure to browse store ads before heading out for your weekly haul, and price compare your essentials at several different stores to make sure you’re getting the best deal. Combined with some creative couponing, and opting for off-brand products, you can save a significant amount of money here.
6. Subscriptions. Subscriptions never seem like much when you sign up for them, but cumulatively, they can occupy a significant chunk of your budget. Thankfully, most subscriptions are relatively easy to cut; take a look at your monthly bank statement to see what clubs, gyms, and entertainment services are automatically withdrawing from your account every month. Even if you’re only able to cut half of them, you could save a few hundred dollars a month or more.
7. Entertainment. Entertainment is both the easiest and hardest category to cut back on. It’s the easiest because there aren’t technically any necessities in this category, which means you can cut them out entirely. It’s also the hardest because these expenses tend to be the most enjoyable. Consider using a ranking system to determine your favorite expenses, and cut the ones that don’t compete with the others. Then, consider opting for less expensive versions of your favorite forms of entertainment, such as cheaper restaurants.
Living Below Your Means
You may not like some of the sacrifices you’ll have to make, but that’s the price of taking control of your finances. Living below your means, by spending far less than you make, is the best way to get ahead—regardless of what your specific goals are. With the right plan in place and sufficient discipline to execute it, you should have little trouble gradually building the life you want for yourself.