Author Archive

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?

We often fool ourselves into thinking that the more we spend, the better and more memorable a vacation will be. While money can buy certain memories, the correlation is probably much weaker than you’d expect. In fact, simple and inexpensive vacations are often the most relaxing, and the most memorable.

I love Mickey Mouse and the magic, wonder, and excitement of a Disney vacation. It’s something I look forward to doing with my family. But I won’t go when my kids are too young to remember the experience or often enough that it becomes commonplace and thus boring. I also remember when I went to Disney World as a kid, coming home exhausted, having spent every second of my vacations there trying to have as much fun as possible to justify the high cost of such an experience.

Compare that experience to a recent trip I took hiking in the Rocky Mountains. Even with the high price of gas, driving to my destination was still less than the cost of a single airline ticket to a more exotic location. Spending my days hiking cost no money aside from food and drinks, and I was getting exercise as an added bonus. The Magic Kingdom may be a sight to behold, but has nothing on the views afforded by Mother Nature. Nights were spent chatting with my companions, playing cards, reading, and relaxing. Without an Internet connection or cell phone service, the distractions of home and the worries of work were quickly forgotten. Between the exertion from the hikes and the fresh mountain air, I slept long and deeply each night.

Wherever you live, you can surely find a similar destination nearby. Whether you spend time at the beach, camping in the woods, or hiking in the mountains, you’ll probably find your trip to be much more relaxing than more expensive alternatives. I read recently that each American “owns” 3 acres of land in the form of their share of our National Parks. Make use of your share and you’ll likely have a memorable vacation that exceeds expectations in all categories.

Pets can bring enormous joy into our lives, but can also cost us a lot of money. If you are considering a pet, or would like to keep costs as low as possible, we here at Lending Club suggest you consider the following tips that will benefit you as well as your pets:

The preceding tips can help to make the joys of pet ownership more affordable. Even those who consider their pets priceless would agree that lower costs add to the value they receive from pet ownership.

When you are careful with your personal finances, you do everything possible to ensure that every dollar spent is done so in an efficient manner. Once a purchase has been made, getting the most value from that purchase is a continual effort. There are many purchases that encourage or even enable additional savings.

One example of such a situation is purchasing a high-speed Internet connection. Once that service is in place, you can save money by using your connection to pay significantly less for home phone service. Whether you prefer to make calls from your computer, or through your normal phone, there are many inexpensive options available. I choose to use Vonage, which I have connected to all of the phones in my home.

For less than $20 a month I get more than enough talk time for all of the local and long distance calls I need to make. For an extra $5 I could have unlimited calling, if needed. Plus, I get many more features (voicemail, caller ID, call waiting, call forwarding, 3 way calling, local access numbers for out of town relatives) than I would through my local phone company. A similar amount of services, including long distance, would cost me at least $75 per month.

The $55+ I save each month easily covers the cost of my high-speed Internet connection. So a purchase that might seem like an extra expense is actually able to save me more than it costs.
The additional time I save through the speed of the connection is an extra bonus. Also, entertainment options available through the Internet (simulcast TV coverage, archived series episodes, music and video sites) make my cable subscription seem like less of a necessity. I certainly do not need premium cable with all of the sports, movies, and television I can watch for free over the Internet.

This one example showed how spending money could actually save you more. By taking advantage of the opportunities presented by a purchase, you can get maximum value from the dollars you do choose to spend.

People say that hindsight is 20/20, meaning that looking back we see things most clearly. Reviewing our financial transactions after they are complete can be a valuable learning experience that will help prevent you from repeating prior mistakes.

Performing a financial transaction post mortem, as I like to call it, is most useful for financed purchases that we pay off over a long period of time. The true cost of these transactions is most complex, and thus most insightful when analyzed. A typical example might be to review the cost of a car when you finally sell, donate, or have it hauled away.

The standard argument as to why buying a car is better than leasing one is that at the end of the payments, you’ll have an asset if you buy and nothing if you lease. The fact that monthly payments are higher, the asset in question is worth significantly less than when you bought it, and it continues to depreciate, makes the comparison difficult. Once you finally get rid of the car, then the true costs can be compared.

Crunching the numbers on the first car I bought went something like this: I put $2,500 down, paid a total of $19,630 in payments and ultimately traded the car in for $4,500. I owned the car for 67 months, which means that it cost $17,630 / 67 months or $263.13 per month. Had I leased the car, I would have put $2,000 down and paid $149 a month over 36 months. This route would have cost $205 per month (monthly cost plus the down payment amortized across the 36 months) and I would have to find a similar deal on another car after the lease ended.

What this analysis shows is that it would have been better for me to lease the car than to buy it. Of course, there are other factors that make the lease seem even better (maintenance I paid for that would have been included had I leased, giving me a more reliable car all the time) and some that make the lease seem worse (mileage restrictions).

I’m not saying that leasing a car is less expensive than buying one. In fact, I’ve seen cases where either option could be less expensive. The point of reviewing prior transactions is to learn from the experience. If you find yourself in a similar situation to the last purchase of a given item, you may reconsider how to approach it. Even if your situation is significantly different, as mine was when I was ready for another car, reviewing your prior transactions will make you better informed and help you make smarter decisions going forward.