EP105 How to decide which costs to cut

To decide which costs to cut in order to meet a budget, you can follow a systematic approach that balances necessity and impact. Here’s a step-by-step guide to help you prioritize and decide on cost cuts:

1. Review All Expenses

List all expenses: Start by making a detailed list of your fixed and variable expenses. Fixed expenses include rent, utilities, insurance, etc., while variable expenses include groceries, entertainment, and discretionary spending.
Categorize: Break your expenses into categories such as essential, important but flexible, and non-essential.

2. Prioritize Essential Expenses

Non-negotiable expenses: These are the core costs that must be paid (e.g., rent, utilities, debt payments). These should be prioritized and remain mostly unchanged.
Minimum necessary levels: For some essentials, like utilities, you may be able to reduce the amount spent (e.g., turning down the heat or using less water).

3. Evaluate Non-Essential or Flexible Spending

Discretionary costs: Look at categories like dining out, entertainment, subscriptions (magazines, streaming), and luxury purchases. These are the first to be reduced or eliminated.
Subscriptions/Automatic renewals: Review recurring payments such as gym memberships, streaming services, or software subscriptions. Cancel unused or unnecessary subscriptions.

4. Look for Alternatives or Cheaper Options

Switch to cheaper alternatives: Research cheaper alternatives for necessary services like insurance, phone plans, or internet providers. Even small savings can add up over time.
Negotiate bills: Contact service providers to see if you can negotiate lower rates (e.g., phone, cable, or internet services). Some companies offer discounts if you ask.

5. Consider the Impact of Cutting Certain Costs

Short-term vs. long-term impact: Consider both the immediate savings and the long-term consequences of cutting a specific cost. For instance, cutting back on regular car maintenance might save money now but lead to more expensive repairs later.
Quality of life: Ensure that cutting costs doesn’t significantly affect your quality of life, especially for essential areas like health, nutrition, or safety.

6. Use the 80/20 Rule (Pareto Principle)

Focus on the biggest expenses: Often, 20% of your expenses account for 80% of your costs. Identify the biggest or most recurring expenses and see where you can make cuts.
Small cuts matter too: While cutting small, discretionary costs might not seem significant, they can add up when combined over time.

7. Look for One-Time Savings

Sell unused items: If possible, sell unused items (e.g., old electronics, furniture, clothes) to generate some cash that can go toward your budget.
Defer big expenses: Postpone non-urgent large expenses or big purchases until your financial situation improves.

8. Revisit and Adjust Regularly

Track progress: Regularly monitor your spending to see if you’re meeting your budget goals. Adjust as necessary.
Reevaluate priorities: If your financial situation changes, re-evaluate your expenses and re-prioritize.

Example of Cutting Costs:

Housing: If rent is too high, consider downsizing or moving to a less expensive area.
Transportation: If you’re spending a lot on gas or a car payment, consider using public transportation, carpooling, or switching to a more economical vehicle.
Entertainment: Cut back on expensive nights out and opt for free or low-cost activities, like hiking, community events, or movie nights at home.

By carefully evaluating your expenses, prioritizing your needs, and being mindful of both short- and long-term effects, you can make informed decisions on where to cut costs and meet your budget.