By: Jalil Mills, MBA
Managing fixed expenses is crucial for achieving financial independence. Fixed expenses, including rent/mortgage payments, utilities, and insurance premiums, typically eat up a huge chunk of your monthly income. Unlike "discretionary" (guilt-free) spending, these costs are usually non-negotiable and recur regularly, meaning there is no avoiding them. Maintaining these expenses provide an overall picture of one's financial health.
By effectively managing fixed costs, you can create a more predictable financial framework, reduce the risk of overspending, and allocate resources and extra money more fluidly. Also, minimizing fixed costs frees up money that can be used towards savings, investing, and debt repayment. This is especially important in today's economy.
Today, the aim is to provide practical strategies to trim your fixed expenses down so that you can take a breath of relief and get ahead financially. This guide will offer actionable insights and tips to help you accelerate your savings, increase investing and aggressively attack your debt.
With the U.S. racking up $1.75 trillion in total student debt (both private and federal), the average borrower graduates from undergraduate school with $28,950 (Hahn, Alicia). Tack on out-of-state tuition costs and graduate education and this number can easily exceed 3 times the average amount. This is truly scary, especially if your annual income barely scratches the surface of the total balance owed.
This stresses the importance of reducing fixed expenses. Whether it's negotiating lower rates, downsizing in housing, or increasing income, this blog will explore various avenues to trim fixed costs without sacrificing your quality of life. Ultimately, the goal is to empower individuals to take control of their finances, achieve greater financial flexibility, and work towards their long-term financial goals.
Understanding Fixed Expenses
Fixed expenses are essential costs that remain relatively consistent from month to month, regardless of changes in usage. These costs are predictable and recurring, making them a fundamental component of financial planning. Since fixed expenses consume a large portion of a household's income, they directly affect the amount of extra income available for saving, investing, and financial goals specific to you.
Having high fixed costs compared to your income can restrict tour level of financial freedom, limit your options, and leave you vulnerable to financial emergencies. Moreover, you may take a direct hit to your bank account, debt accumulation and financial obligations.
Reducing your fixed expenses is beneficial for several reasons. Firstly, it frees up financial resources that can be allocated towards things that further your future. One can also create a more flexible budget that allows for greater adaptability to changes in income or expenses. Additionally, reducing fixed expenses can lessen the impact of unforeseen events and financial hardship. Due to inflation, households are experiencing income volatility and economic uncertainty (just look at the cost of eggs!). Moreover, optimizing recurring expenses enables individuals to achieve a better balance between current consumption and future financial security.
Assessing Your Current Fixed Expenses
Identifying and categorizing fixed expenses is an essential step in managing finances. To begin, individuals can review their bank statements, bills and financial records to identify constant recurring payments each month. Common line items are rent/mortgage, insurance premiums, loan repayments, subscription services, and utility bills. Once identified, it's helpful to use a budget app to categorize these separately from discretionary spending to get a clear idea of their impact on the overall budget. Many apps categorize expenses automatically.
You can also review financial statements for prior months to track the ratio of income allocated to fixed expenses compared to other financial responsibilities. This helps to identify areas for potential savings and to make informed decisions about budget adjustments.
Furthermore, evaluating the percentage of income allocated to fixed expenses is important as it's a vital indicator of financial health and wellness. To calculate this percentage, divide your total fixed expenses by your total monthly income and multiply by 100. For example, you have $8,000 in total fixed expenses, divided by $6,000 in total monthly income, multiplied by 100 equals 50%. Therefore, 50% of your total monthly income goes towards fixed costs. It is a good rule of thumb to keep this percentage under 65%.
Strategies for Reducing Fixed Expenses
Strategies for reducing fixed costs offer individuals opportunities to optimize their budgets and improve financial health.
(1) Negotiating Lower Rates. Negotiating rent or mortgage payments can yield significant savings, especially in rental markets. Similarly, negotiating utility bills by seeking discounts, switching companies, or adjusting plans can result in decreased monthly expenses.
This is not a guaranteed solution, however, it can be worth it to pick up the phone and call the landlord, property manager, or service provider to ask about your options. Depending on the circumstances, it can also be helpful to call the companies and negotiate a different payment due date or payment schedule. Negotiating insurance premiums, whether for health, auto, life or homeowner's insurance, can lead to lower rates, especially for those with good payment and claim history, or who decide to bundle policies.
When it comes to credit card and bank fees/overdraft payments, it can also be beneficial to hop on the phone with a representative. Consider using the following script found in Ramit Sethi's I Will Teach You to be Rich:
You: "Hi, I just saw this bank charge for overdrafting, and I'd like to have it waived."
Bank/Credit Card Rep: "I see that fee... hmm... Let me see here. Unfortunately, we're not able to waive that fee. It was [some BS excuse about how it's not waivable].
Instead of giving up right then and there, try the following responses:
You: "Well, I see the fee here, and I'd really like to get it waived. What else can you do to help me?" (It's important to re-emphasize your complaint).
Bank/Credit Card Rep: "I'm sorry, we can't refund that fee."
You: "I understand it's difficult, but take a look at my history. I've been a customer for more than three years, and I'd like to keep the relationship going. Now, I'd like to get this waived - it was a mistake and it won't happen again. What can you do to help?"
Bank/Credit Card Rep: "One second please... I see that you're a really good customer... I'm going to check with my supervisor... I was able to check with my supervisor and waive the fee. Is there anything else I can do for you?" (Sethi, Ramit).
And, bingo! It's important to emphasize that a solid financial track record increases your ability to negotiate reduced or waived feeds. Also, explaining your unique financial circumstances can often lead to favorable outcomes, like the possibility of settling outstanding debts and collections.
(2) Downsizing. Downsizing is another powerful strategy for trimming fixed costs. Downsizing your living space, whether by relocating to a smaller space or renegotiating lease terms, can drastically decrease housing costs. Selling or downsizing a vehicle can reduce not only your monthly loan, but also insurance, maintenance and fuel. Additionally, reviewing and potentially cancelling subscriptions (gym memberships, streaming services, apps, etc.) can free up additional funds.
(3) Energy Efficiency. It can be helpful to install energy-efficient appliances such as Energy Star-rated refrigerators or LED light bulbs to lower electricity bills over time. Improving home insulation, sealing air leaks, and upgrading windows can enhance energy efficiency and reduce heating and cooling costs. Several minor improvements include turning off lights when not in use or adjusting thermostat settings can contribute to long-term savings on utility bills.
(4) Refinancing and Consolidation. These resources can be useful (although, use these tools wisely). Refinances mortgages at lower interest rates can lead to decreased monthly payments and long-term interest savings. Consolidating debt, such as federal student loans or high-interest loans, into a single, lower-interest loan can reduce the overall burden. It's also helpful to review credit card interest rates and consider transferring balances to cards with an introductory 0% annual percentage rate (APR) for temporary relief while paying down debt more efficiently.
(5) Evaluate Transportation. Going back to transportation costs, evaluating avenues for lowering fixed expenses related to commuting can be extremely beneficial. Exploring options such as carpooling, public transportation and biking to close destinations can provide a temporary solution. Ride-sharing with coworkers or friends can share the costs of fuel and maintenance, reducing your overall monthly transportation expenses.
(6) Increase Income. Now that we have discussed ways to cut fixed costs, it's time to talk about one of the most proven approaches. Sometimes there is no way to get around increasing your income in any way that you can. If you find yourself drowning in debt and fixed expenses, making a short term sacrifice to work overtime, work a side hustle a few days a week, or negotiating a raise can make a huge impact. The important thing to note here is that it should be a short-term sacrifice in order to make a long-term difference. Once you are out of consumer debt or can get ahead on bills, you can take your foot off of the gas pedal.
Implementing and Tracking Changes
Implementing and tracking changes are critical steps in the process of reducing fixed expenses. Setting specific goals for reducing these costs provides clarity and direction. These goals should be realistic, measurable, and tailored to your specific situation. An example could be, "By tracking my expenses, I aim to allocate an extra $300 per month on top of my credit card's minimum payment." Whether aiming to reduce housing costs, utility bills, or debt repayments, settling clear objectives gives you a sense of motivation and accountability.
Creating an action plan with milestones is essential for translating goals into actionable steps. It's often relieving to break down the larger goal of "reducing fixed expenses" into smaller, manageable tasks. Try printing out a sheet with a box dedicated to each milestone (i.e, pay off smallest credit card, reduce grocery budget by $100, pay off $5,000 of student loan, etc.). Once you achieve a milestone, cross it off and have a small celebration such as a nice dinner or treating yourself to a small gift. Doing this makes the process less overwhelming. This way, you can track progress, celebrate successes, and stay motivated throughout the journey.
Using budgeting apps to track progress is also valuable for monitoring expenses. Budget apps such as NerdWallet and EveryDollar offer features such as expense tracking, paycheck planning, and diagrams of your spending patterns. By reviewing your finances and comparing actual spending to budgeted amounts, you can identify areas of overspending and make informed decisions about how to adjust accordingly to meet your milestone goals.
Staying motivated and adjusting your strategy are important for long-term success. Maintaining motivation can be challenging, especially when real life events come into play. This is why it's absolutely vital to remind yourself of the overall "Why?" Why do you want to get out of debt? What does financial freedom mean to you? For some, they want to ensure that their family and loved ones are protected in the future. For others, they may want to spend more time traveling and less time working hard just to pay bills. By staying proactive and resilient, individuals can overcome obstacles and continue making progress towards their financial goals.
Conclusion
The significance of reducing your monthly bills cannot be overstated. By managing these costs effectively, you can create a more stable financial foundation. Whether through negotiation, downsizing, improving energy-efficiency or working a side hustle, every effort to trim fixed expenses contributes to your financial health and overall well-being.
As we wrap up, I want to encourage you to take these proactive steps towards financial freedom. Empower yourself with knowledge, embrace short-term sacrifices for long-term rewards, and stay motivated as best as you can. Remember, every small step adds up, and your commitment to reducing fixed expenses will pay off in the long run.
Disclaimer: The information provided in this blog post is for educational purposes only and should not be considered financial advice. Consult with a financial professional for personalized guidance.
Sources
Hahn, Alicia. “2024 Student Loan Debt Statistics: Average Student Loan Debt.” Forbes, Forbes Magazine, 18 Apr. 2024, www.forbes.com/advisor/student-loans/average-student-loan-debt-statistics/.
Sethi, Ramit. I Will Teach You to Be Rich. Workman, 2019.