Many of us could do better in our effort to reduce spending in our family budgets. Often mom & dad get fired up about how to reduce spending. They’ve bought into the idea that eating rice & beans for a few months is the only way to turn their financial ship.
Cable TV is history. Streaming services are eliminated. Restaurants are a thing of the past. Non-essential items are put up for sale on Facebook Marketplace. The annual family vacation was summarily canceled. What in the world is a staycation the kids want to know?
The children plan a mutiny. They want to spend a week in Gulf Shores for spring break.
Maximizing wealth sounds boring to them.
“Why should we be forced to suffer because mom & dad can’t properly budget?”
The kids are defiant. They’ve firmly dug in their heels and will resist this new lifestyle with every fiber of their being!
So how can a family reduce spending without creating an unwanted uprising?
Spending can be effectively reduced. It requires teamwork, compassion, and sacrifice though. Forced sacrifices will often be met with opposition. Shared sacrifices, while not ideal are generally palatable. When implementing a spending plan it’s best to be open and honest. Parents should always model the expected sacrifices first.
How Much Needs To Be Cut
It’s important to know if a family budget is in red or black. Every spending plan has at least some fat in it that could be trimmed. Some spending plans are so far upside down any progress seems utterly hopeless. Others are just in need of some tweaks.
Businesses are required to generate income statements. Some companies produce them monthly, others quarterly, and some only generate them at the end of each year.
Income statements are scorecards. Is the business profitable or unprofitable? Households would do well to generate income statements on a monthly basis.
Here is the basic formula: Income — Expenses = Profit or (Loss). For a family, the terms used in the formula are simply adjusted to Salary —Expenses = Profit or (Loss).
When salary exceeds expenses a family is profitable. If expenses are greater than the salary the family is unprofitable.
Pull up your banking app and look at the income and outflow from last month. Were you profitable or unprofitable? Now expand that to the last quarter. If you’re feeling super froggy create an income statement for the last full calendar year.
How did you do? If you were profitable then you don’t have to cut anything or at least not much. If you are unprofitable then you need to either increase your income or decrease your expenses — or both.
Gazelle Intensity
Cutting fixed expenses can be problematic. Rent, house payments, car payments, cell phone bills, and other things are fixed. Some are fixed for several years (car payments) others are fixed for a shorter period (insurance).
Many other expenses are variable (groceries) and some are totally discretionary (booze). Go through your income statement and classify each expense as either fixed, variable, or discretionary.
Fixed expenses can’t be cut in the next month or two. They can eventually be adjusted but that’s part of your long game.
Trimming variable expenses is less complex. The extent of the haircut is up to you.
Eliminating all discretionary expenses is possible. Tread cautiously, though.
It’s my experience that an incremental process is better than a sudden jolt.
Often, families decide to cut every possible expense on day one. Cold turkey is the only way to make this happen, son! We’re fired up with gazelle intensity! We must strike while the iron is hot!!
Here’s a brief article where I discuss the danger of acting like a gazelle.
Charging in like a rogue rhino will result in an uprising of epic proportions.
Unprofitable families need to get to at the least break-even point. Trim the difference between take-home pay and expenses.
Profitable families should use this exercise to locate slothful spending habits. If a family spends $500 per month at restaurants but doesn’t have college funds then this would be a good time to remedy that issue.
Step #1 — Determine how much spending needs to be cut.
Reduce Spending — The Family Meeting
Spending stabilization is a team effort. Budget cuts will impact everyone in the family. Hear and consider every voice.
Mom and dad must absorb the first budget blow. The children did not create this financial mess. Leadership often involves sacrifice.
What are you both willing to sacrifice to maximize your family’s financial future?
Step #2 — Mom and Dad identify something that they are willing to sacrifice in order to stabilize spending.
Admitting to your children that financial missteps have been made will be difficult.
“Kids, your mom and I have recently made some money mistakes. We are in the process of correcting them and want you to help us get things on track. Our goal is to cut $x from our spending each month. We want to know if you have any ideas on how we can reach this goal as a family.
I’ve canceled my annual hunting trip and have also decided to cancel our lawn and snow removal service.”
“Joshua, Hannah it’s super important that we get this right. Please accept our apologies. I will begin doing my own nails once again. Hannah, maybe we could do that together? I am going to stop getting coffee before work and will start taking my lunch each day. Both of those things kind of got out of control.
“Kids, take some time and think about what you’re willing to give up to meet this family goal. Let’s have another family meeting this time next week to discuss your ideas.”
Step #3 — Give the kids an opportunity to participate.
Crush It In The Kitchen
Food can be a huge financial strain on families. American families spend just under $8,000 per year on food. It’s typically the third largest expense behind only housing and transportation. How can a family trim their food bill without starving or eating in an unhealthy manner?
The incremental approach works great when curbing food expenses. If your annual food expense is $8,000 then a manageable goal is a 10% reduction in food expenses. Now that you have a goal, let’s discuss some simple-to-follow savings strategies.
Use the online shopping option. I used to wave off this idea but not anymore. No more lists to carry around the store or to make. When something needs to be replaced simply put it in your online cart. Marketers can’t play you with enticing end caps when shopping in this manner.
Plan actual meals. Make a list of the upcoming meals. Buy only what you need for the meals. When possible use the same ingredients for multiple meals.
Embrace Aldi. If you are interested in saving money on virtually everything give it a shot. Aldi’s only drawback is inferior packaging. The food, in almost every instance, is top-notch.
Learn to love leftovers. We typically cook large meals that can be eaten more than once. This method also saves cooking and preparation time.
Stick to the plan. Agree upon the amount you intend to save monthly and stick to it. Do the math and stick with your agreed-upon plan.
Restaurants are challenging. Saving money at restaurants is difficult. You can always avoid the appetizers, booze, and dessert to save a few bucks. Why bother though?
Step #4 Reduce Spending on Food
Water Works & Electric Company
Reduce variable expenses like utilities. Heating and cooling expenses can be reduced considerably. Savings of up to 10% are possible simply by thermostat manipulation.
Track sources of vampire power and reduce them.
Americans spend, on average, $4,000 per year on electricity. Set a goal to trim that expense and get busy doing it. Surely you wouldn’t mind a $400 gift, would you?
Step #5 Reduce Spending on utilities.
Take A Scalpel To Discretionary Spending
Retirement contributions, debt reduction, and college funds should rank higher than Dr. Pepper or Johnny Walker.
Restaurants are a luxury. Families don’t blink about outsourcing meal prep and clean-up but choke at hiring a housekeeper. Avoid restaurants if you’re deep in debt. If you can clean your own house — then do it.
Cancel your gym membership if you’re not using it.
You get the point.
Step #6 Cut at least one discretionary item.
The Family Meeting Redux
Mom and dad have determined how much needs to be cut. Each has absorbed the first blow to the budget. Now it’s time to make this a family project.
Josh and Hannah huddled together after school and discussed their predicament. Josh loves playing baseball and doesn’t want to give that up. Hannah is just starting to excel in gymnastics and doesn’t want to lose any momentum. They are confident that they have just the thing that will benefit everyone.
“Mom and Dad, Hannah interjects. Josh and I have talked about this situation every day after school. We eliminated everything that was a non-starter. Here’s our suggestion: Adjust our Friday pizza outing.”
Josh picked up where Hannah left off, “We don’t want to cancel it just adjust it. We believe that we can begin making pizzas at home for a lot less money. I imagine we’re spending over $100 each time we go out. We priced pizza stones and downloaded several different recipes. Making pizza as a family sounds fun to us.”
Step #7 Allow the entire family to participate.
Too Good To Be True
Perhaps I am being a bit naive. I am fully persuaded that shared sacrifice is easier to digest than sacrifice that is imposed.
Cutting expenses, even obvious ones, is a sacrifice. Once we enjoy something (morning drive-through coffee, for example) it’s easy to think that it is normal. That’s why cutting expenses can be challenging.
Reducing spending is not as fun as getting a raise or picking a great stock. It is vital to your long-term financial health though.
Resist lifestyle creep!
Stabilizing spending will help you maximize wealth.
Bonus!
Step #8 Raise the deductibles on your insurance policies.
Higher deductibles typically result in lower insurance premiums. Low deductibles are a good idea only when there is no excess cash. When your cash cushion increases talk to your agent!
I dare you to profit!