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Reducing Expenses vs. Increasing Income

Making more money is a surefire way to steer your financial future in the right direction. But given the realities of our current economy, most people don’t occupy the driver’s seat when it comes to receiving a salary increase or bonus. Seeking additional sources of income is always an option; however, this course of action may entail an up-front investment of both time and money, which you may not have to spend. So, instead of focusing on increasing your income, take the path toward financial prosperity by reducing your expenses.

Keeping track of how much money is coming in and how much goes out each month is the crucial first step to saving money and lowering your expenses. Write down all your expenditures — from big ones like rent and insurance to smaller ones like movie tickets and mocha cappuccinos. Following are some effective ways to reduce expenses, stretch your dollars and make your pennies count:

Utilities: Reduce your heating and cooling costs by investing in a programmable thermostat that lets you lower your heating and cooling temperatures when you’re not home, as well as ceiling fans to circulate the air more efficiently. Save on electricity with energy-efficient light bulbs — turned off when you leave a room —and unplugging appliances and devices when not in use. Save water (and money) by fixing leaky faucets and toilets, minimizing lawn watering and investing in a shower-reduction kit.

Insurance: Explore alternatives and get competitive bids from different companies for your health, home, auto and life insurance. Be sure to take into consideration that lower premiums do not always translate to the best value. Do a risk analysis on your auto insurance deductible: If you have a good driving record and own your own vehicle, it may make sense to choose a higher deductible to save on premiums. Shop the wide variety of available health plans and consider joining a health-sharing group for a substantial cost reduction. If you have a family, the general rule for purchasing life insurance is to base it on three to five years of replacement income. Home/renter insurance plans should be reviewed to ensure that your policy isn’t lacking in important areas of coverage and doesn’t include coverage for items that are irrelevant.

Luxuries: Understanding that one person’s “luxury” is another’s necessity, consider a few more cost-cutting options: Bring lunch to work instead of buying it each day. Look for free or low-cost forms of entertainment, like community “music under the stars” concerts and high school sporting events. Buy pre-owned objects at garage sales, thrift stores and online auction sites. Cultivate a garden — even a small plot can provide a large amount of fresh food.

In addition to the expense-reducing tips above, using these expense ratios as a general guideline may save you around 10% of your income:

  • Housing: Spend no more than 35% of your income toward housing, including taxes, repairs and utilities.
  • Transportation: Spend less than 20% on auto loans, leases, insurance, parking, etc.
  • Living Expenses: Spend 20% or less on food, clothing, medical and entertainment.
  • Debt Repayments: Spend 15% or less, not including a mortgage or auto loan.