Posted by Mike Smith :: July 30, 2008 @ 7:05 am

I recently sorted all of my expenses by size to get a better understanding of which items were costing me the most. Looking at spending from this new perspective is insightful and beneficial. What follows is my thought process and analysis of my top expenses to illustrate how this method is used. Your expenses will surely be different, but the method may help you as well.

I stopped my list after my top 6 expenses. After that, the dollar amount of other categories fell off sharply. My actual largest expense, taxes, was not included in my analysis. Taxes are important, and clearly a burden, but I accept taxes as a by-product of earning money and have somewhat less control over their reduction.

My top 6 expenses were mortgage principal, groceries, childcare, charity, mortgage interest, and property taxes/insurance. My largest expense, mortgage principal, is actually a stealth savings category because mortgage payments that go towards principal directly increase the equity in my home. So reducing that expense is of little concern.

Groceries come next and there are certainly things I can do to save here. I’ve already implemented many of the cost savings activities that I’ve advocated here on the Lending Club blog, such as shopping sales, following a list, buying in bulk, etc., but there’s still more I could do. Making one large shopping trip instead of many smaller ones should help to lower my costs by reducing unnecessary impulse buys. Knowing that groceries are my largest true expense provides further motivation to reduce things even further.

Childcare is an expense that we’ve already considered in great detail to weigh the pros and cons. We’ve already limited the number of days that we use it and though it’s one of our larger expenses, it is still quite inexpensive by our calculations.

We’re committed to donating a certain amount to charity on a yearly basis. So while this expense could be eliminated entirely, it is right on target with our planned commitment and we have no intention of reducing it.

The amount of mortgage interest we pay is a function of the cost of our home. To reduce this expense, we’re already significantly overpaying our mortgage each month. I’m happy with the progress being made here.

Property taxes and insurance are also a function of the cost of our home. I’ve met with my insurance agent to ensure that we have sufficient coverage and shopped around to make sure that I’m getting a fair rate. Otherwise, there’s not much I could do to reduce this cost further.

Obviously all expenses are within our budgeted amounts, but this exercise helped me to focus on those areas that could stand for improvement. In my case, I only found a few areas to cut further. By looking at your top expenses, you will see where your actions can have the largest effect. Cutting a few percentage points off of a large expense will do more good than depriving yourself of your daily latté or whatever other small vice you may have.

Which of your largest expenses could you trim or eliminate?