For the uninitiated, “So, Inju, How do I reduce my expenses!” is the third blog post in the Personal Finance series. The first two are primarily about an important concept called Money Trail and will set you up for this post. So, check them out before you continue reading further. Find them here & here.
TL;DR: How to reduce expenses?
By not spending money. So Simple.-A beloved friend, Aarya Agrawal
Jokes apart, that’s a seriously interesting question. It seems like a logical step in hindsight, doesn’t it? But have you thought about cutting an expense down at the time of pulling money out of your wallet?
I’d like to ask you a counter-question before we get into the details of ways to reduce your expenses.
Why do you want to reduce expenses? What’s the motive?
Think long and hard before answering.
Write this down somewhere in your diary. We’ll come back to it later.
How to reduce expenses
Okay, buckle up! You’re in for a ride.
Fundamentally there are two ways to reduce expenses.
- A deliberate way to reduce expenses.
- A change in your perception of money
Let’s explore the first way.
A Deliberate Way To Reduce Expenses!
A deliberate way to reduce expenses? What’s that, Inju?
A deliberate way is the knee jerk reaction we look for when we realize something is awfully wrong with our finances. It’s what has prompted you to explore ways to reduce expenses after you’ve explored your money trail. Deliberate ways will make you conscious about your money before you spend next time. There are many ways that have been in practice for a long time.
Let’s dive into them one by one.
#1 Journaling Your Expenses
Seriously, Inju? Journaling is gonna help me reduce expenses?
Hell Yeah! Believe it or not, Journaling is an amazing tool and it’s the #1 tool that has helped me reduce expenses. I’ve been journaling about my life & money for a long time. Writing what’s happening in your life and reading it, gives you insights that you wouldn’t otherwise figure out. It makes you conscious and observes any obvious patterns.
Journaling is equivalent to ripping apart a machine to see what’s wrong.
Writing down your expenses makes you conscious about each and every purchase. Writing forces your brain to think about the reasons behind it. I honestly don’t know the science behind it, but ever since I’ve been penning down my expenses in my diary, I always avoid purchases that don’t make any logical sense to find a place in my expense list. So I avoid it. It is a mechanism that forces you to consciously spend money and hence reduce expenses.
It is sort of a guilt trip, but it works.
Here’s the format I use.
Inju, what’s a category?
If you’re a data-savvy person like me, or even otherwise, it always helps to group similar expenses together. This grouping is called categorizing. I have categories like Groceries, travel(for my trips), utilities (electricity, fuel, etc), laziness(spends on On-demand-food delivery, etc) and Misc.
Now, the Misc category will not be completely defined at the beginning. And most likely, all your non-obvious spends like date nights, Friyay parties tend to go into the Misc category. But depending on the amount of the expense, you can choose to create a separate category for say “Socializing” like how I have one for travel. Again, there’s no hard and fast rule for categorizing expenses. The main idea behind journaling expenses is to make you conscious during your next purchase.
#2 Preparing & Adhering To A Budget
Hold it there, champ. I know it’s not what you wanted to do in your life, “constrain yourself” with a budget. We’re all inspired by movies to be free-flowing, spontaneous. But boss, anything you wanna do in life needs money and last I checked, money plant doesn’t grow money instead of leaves. So, sit back and read on.
The fundamental building block of budgeting is having pre-defined categories and then allocating money to restrict over-spending. There are primarily, two types of budgeting practices:
Zero-Sum Budgeting aka Rigid Budgeting
In this type of budgeting practice, you assign a job for each and every rupee you make, even before it comes into your hands. The categories need to be pre-defined
Essentially making, Inflow-outflow=0. Essentially, the rupee follows a pre-defined money trail.
I call this rigid budgeting because it offers zero flexibility, duh. By the nature of this budgeting, it is not suitable for everyone. I occasionally like to do things spontaneously, so this isn’t something I would prefer, likewise, there will be people who find his amusing.
Thumb-Rule Based Budgeting
In this type of budgeting, you have thumb-rules and allocate money accordingly. The most famous one being the 50-30-20 rule. It’s not a hard and fast rule to follow the predefined thumb rules, you can always make your own x-y-z rule.
Traditional practice; X-Y-Z Rule
X% of your income for your wants.
Y% of your income for your needs.
Z% of your income for savings.
Inju’s practice: Z-Y-X Rule
For me, savings take higher precedence over anything else. Inju’s rule in number looks something like this, 40-30-30.
The advantage of this practice being, you have set a broader goal and not specific goals. So you can play around with spends under, say, “wants” and I love that kind of flexibility.
#3 All The Other Practices!
What? Just two? Inju, that’s all you got? two?
Yes. Absolutely, those two have made all the difference I wanted, so I am proposing those two. But you needn’t restrict yourselves. Go bonkers and wear down google search until you find the above-mentioned two strategies stand out in almost every blog you find. That’s because of two reasons.
- The above two are really the most effective of them.
- Every other advice just beats around the bush or is a sub-task for the above-mentioned strategies.
But for your happiness’ sake, I will mention a few practices.
- Piggy Bank Approach: In this practice, you set aside a piggy bank for each purpose/category. Put money inside the piggy bank when you get your paycheck. This seems ridiculously similar to budgeting, isn’t it?
- Stop using Cards: In this practice, you are expected to not use any cards for the transaction. The meta reason being, if you see cash flowing out of your purse, you stop spending. It sounds like something we discussed in #1.
- Reducing Spends on Utilities: This is something that people with higher utility expenses like electricity or fuel are advised to do. But if you’re running a small scale sidekick in the comfort of your home. So essentially the journaling exercise should tell you if it’s important or not.
The list goes on but you get the idea.
Let’s quickly jump to the second way to reduce expenses.
Changing Your Perception About Money
If you’ve been paying close attention, everything I mentioned above talks about how to stop spending more after you’ve decided to spend. While that gives you some respite in the short run, I highly suspect if you can keep doing that for longer periods of time, especially in times of uncertainty.
A lot of my learnings about personal finance management came from a lot of places, but there’s only one book/person that changed my perspective about money. That deep psychological change is what will enable you to effectively adopt a lifestyle that, in her own words “Transforms your relationship with money”. Give it a read if you like, it is “Your Money or Your Life by Vicki Robin.”
Sounds interesting Inju, so, how do I do that?
It all starts with understanding where your money is coming from.
Almost every single person today makes money by trading time.
What I mean by this is, you spend 10 hours a day, 5 days a week to make money and spend it. Assuming you make about INR 30,000 per month. That translates to INR 600/ Hour as your income.
This really means that you’re choosing to spend 1 hour of your precious, limited time to earn INR 600.
You trade 1 hour of your life to make INR 600.
I don’t have to emphasize the importance of 1 Hour but here’s a blog post by Tim Urban called The Tail End. I want to particularly highlight one sentence that has significantly impacted the way I want to spend my time in the near future (WIP). It goes something like this,
It turns out that when I graduated from high school, I had already used up 93% of my in-person parent time.By staying away from parents, I’m now enjoying the last 5% of that time. We’re in the tail end.
Inju, that’s a touching perspective on time, but how does it help me reduce expenses?
Perfect. Just the right question at the right moment. Now that you understand the value of 1 hour of your life, look at your expenses this way.
Money that you’re spending is earned from the time you were working. Every hour your spend on working is every hour you don’t spend on something you love doing.
But Inju, why do you assume that I don’t love my job?
Oh! You got me wrong there. I am not saying you don’t love your job. I am saying most of us also have families, relationships, hobbies to take care of. But seldom you find jobs that give you enough money, enough time for yourself and things that matter in your life, enough security to not constantly grind oneself, enough satisfaction from what you accomplish, enough love and compassion from colleagues.
If jobs offered all of the above, I wouldn’t be sitting here writing this blog, neither would you be reading such a long post.
So, there are always tradeoffs. The tradeoff is to make a choice between making more money by spending more time or making just “enough” and have time to focus on things that matter.
So, the money you are spending is essentially you throwing away a chance to save the equivalent amount of life energy tomorrow.
Every INR 600 you save today will let you spend 1 hour of your life energy on something that matters.
Now think about all the times you spent money on stuff you didn’t need, yesterday, last week, last month, last year, in the last 5 years?
What if you saved 90% of those expenses and invested them?
Wouldn’t you have had much more flexibility in the way you trade time today?
But Inju, If I keep saving money for tomorrow, how will I enjoy life today?
Hey, sweetheart. Look closely, I have been talking about the money you spend on stuff you didn’t need but thought you wanted. I am questioning those choices of yours that are unnecessary but you keep telling yourself silly reasons to choose them or much worse, come under peer pressure and commit them.
So, In summary, to change your perception of money, you have to:
- Figure out how you’re earning money.
- Figure out how much you earn by spending 1 hour of life energy.
- Now look at unwanted expenses you’ve made in the past and calculate how much life energy you poured into them.
Before I conclude the post, I want you to pull out that diary where you noted down the motive for you to reduce expenses. Do you think your motive still good enough or you got a better reason and a better way to reduce expenses?
Let me know in the comments section below. 😉
That’s all for today folks.
In case we haven’t met before, I am Inju, a resident of the small planet called trailsofinju.com in the internet universe.
I almost forgot, I love feedback and if you have any feel free to drop it in the comments section. No pressure, your choice.
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