Everyday Economics For People, Chapter 3: Budgeting And Reducing Expenses

Mental Heuristic #4: Never pay more if you could pay less.

Mental Heuristic #5: Never pay for more than you need.

Mental Heuristic #6: Never pay somebody to do something you could do yourself.

Mental Heuristic #7: Never purchase anything you did not already have a plan to buy.

We have now discussed the two most major humps to get over: getting out of debt, and then getting out of paying rent. If only you could get past them first, getting past them would be much easier. That is, after you are out of debt and own your home, you can easily save money, which would make it really easy for you to get out of debt and buy a home. It’s a nice little catch-22 that keeps most people ever from accumulating any wealth, which makes them easy targets for loan sharks and stingy employers.

So, how do you get out of debt, and then save enough to put a down payment on a home? Here is where you are going to have to start making some sacrifices. But, there is some very good news: you are unlikely to be bothered much by what you are about to be asked to sacrifice. Why? Because this section is more about how to bring your spending in line with your priorities than it is about denying yourself.

The first and most important thing to do is to stop buying things on credit. Yes, I already said that, and I’ll even say it again: stop buying things on credit! If you are in a hole, you can’t get out by digging deeper. You must stop digging before anything else. As previously discussed, this will be your armor against the infinitude of advertisements and hidden social cues prompting consumptive impulses in you. Only spend money from what you have. Then, each dollar you accumulate or spend will have a much more concrete value in your mind.

Next, although you may resist this advice, you must “simply” document your spending over a period of a month or a few. Document every expense by going through your financial statements once a month, and categorize all of your spending as “savings,” “food,” “clothing,” “shelter,” “transit,” “communication,” “housing,” “entertainment,” “investments,” “interest payments,” “insurance,” “utilities,” “dating,” and any other important categories you may have, such as “medical expenses.”

Once you have done this, you may examine the balance of spending on each category. You will likely be unsurprised by some totals, but you will also likely be shocked by how much you spend in some other categories. Once you have looked at the total allocation of your money, you will be in a good position to decide whether you have given each category the appropriate weight. More likely, you will find that your automatic spending habits are not aligned at all with your overall, conscious budget priorities. If you are accumulating debt, or not accumulating savings (fast enough), then you need either to increase your income, which we will discuss in the next section, or reduce your consumption, which we will discuss immediately.

From your documented spending habits, you can start a process of setting realistic budget limits for yourself, which will help you to make all of your other decisions more easily. For example, it can be difficult to decide if you are spending too much on eating out until you decide how much money you want to spend on food in total, and see how much less food you get when you pay other people to prepare it for you — or, alternatively, what other expenses you would have to sacrifice to maintain a higher budget for food.

I recommend you divide up your spending into two main categories: basic needs, and extras. Basic needs will include everything you need for your body to continue living and for your job and interactions with the world. This typically includes shelter, medical costs, food, clothing, transportation, utilities, and communication.

Subtract the cost of your basic needs from your total income, and you’ll have your total disposable income, which you can now allocate for all of the extras, which include paying off debts or saving and investing. If your basic needs already exceed your total income, or if you can’t afford all of the extras you want, you are going to have to downsize your lifestyle or seek higher income.

There are three main ways to reduce expenses: reducing the quantity of something you consume, reducing the price you pay for something you consume, and increasing the amount of consumption you supply for yourself.

The easiest of these is probably reducing the price you pay for things that you consume, which you can achieve either by shopping around for better deals on the things you pay for, or by switching from pricier versions to lower price versions of the same thing. This includes obvious expenses like frequent haircuts, name-brand groceries, eating out, regular drinking and smoking, etc., but also less obvious things like sharing rent with more renters, renting instead of buying durable goods that you only use a little, going to the library and other public facilities, working out at home or the park instead of paying a gym membership, paying for different, cheaper insurance coverage (safer when you start to have savings), switching to a different phone company, switching to a different streaming service, changing a romantic partner (ha…no, seriously), changing your dress habits, and more.

Depending on your current level of self-discipline, reducing the amounts of things you pay for can also be very easy. For example, you could probably cut personal grooming expenses by half without impacting your life. You could buy half as many snack foods and drinks and probably be healthier as well as wealthier. You could stop paying for new electronic entertainments and take advantage of all of the free entertainment the world has to offer. You could go out to movies and restaurants fewer times. You could purchase fewer shoes and clothes and still dress as well. You could turn down the A/C. You could stop overeating, without considering whether it affects your weight. You could cut back on alcohol and other drug consumption and, again, probably be healthier. You could probably wear less makeup and still be just as beautiful. Whatever luxuries you are indulging in, you could indulge in less of them.

Finally, the most satisfying of them all: replacing paid labor with independence. We live in a society in which everyone pays everyone else to do most of their tasks for them, and we all spend our time doing a bunch of one specialized task for everyone else. Therefore, in order to cut your expenses, you just need to do more stuff for yourself, and continue to collect payment for doing stuff for others.

For example, we all (almost) eat food every day, and that food must be prepared. So, somebody is going to prepare food for you every day of your life. You can either pay other people to make that food, or you can do it yourself at no additional charge. Paying somebody to make your food every day really adds up: easily 700 or more food prep payments a year. Yikes.

We also all keep growing hair, which most of us cut regularly. It is not unusual for some people to pay for a haircut once or twice a week. This adds up to hundreds or thousands of dollars per year. If you learn to cut your own hair or trade hair-cutting with somebody else, you can keep all of that extra cash. If you learn to handle your own plumbing, electrical, computer, and car issues, you won’t have to hire professionals to take care of you. And so on.

Okay, let’s be practical: making your own food takes time, and that is something that you have a limited amount of. Likewise, switching from a car to the bus or a bike may save you money, but it will eat a lot of your time, which might not be worth the amount of money you save.

But you know what you can definitely do on your own? Entertain yourself. Entertaining oneself does not actually cost anything, and sharing entertainment with a lover or a friend or group of friends is also costless but highly effective. It does not matter who you are or what skills you have; you can entertain yourself for free. Also, the library has more books than you can read in your whole life, and they are all free!

Make your decisions about which lifestyle changes you are willing to make to get your budget in balance. Go line by line cutting items that you could do without, do with less of, or do for yourself but are paying people to do for you until you’ve cut everything you can do without and filled up all of your realistic time with services you will perform for yourself.

What expenses could you put off while you shop around and wait for great bargains? What entertainment expenses could you replace with free entertainment? What eating expenses could you eliminate? What clothing expenses could you reduce? What if you stopped drinking or smoking? What subscriptions and memberships could you cancel? What insurance costs could you reduce? Whom are you paying how much to do what tasks for you? Could you move somewhere cheaper? What if you stopped paying for disposable napkins, diapers, towels, toilet paper? What if you committed to a serious relationship and stopped paying for dates and booze and needing to look extra presentable and dating apps and halved your rent/mortgage/utilities and shared all your domestic tasks and had free entertainment of a partner at home and purchased consumables in bulk and shared durable repeated-use items and had a lot of free time previously set aside for dating now for productive tasks which you could divide up according to relative proficiencies? What if you switched from water bottles to a filter?

Bonus: the more stuff you do yourself, the less free time you have, so the less entertainment you need, and the higher your skills rise. Eventually, you may be able to apply self-taught skills toward a self-owned business, potentially garnering an income boost as well as simply cutting costs in the short run.

Real talk: suppose that you have realistically cut everything down to the bone and your budget will still not allow you to make ends meet without accumulating debt. You have a very serious issue here, because your basic life is not sustainable. You will either have to find additional income, a cheaper living situation, or consider leaving the area entirely for somewhere with better opportunities. If you have a family or community worth staying for, rely on them to help you get independently stable. If you don’t have that, what are you staying for, exactly? I am sorry. These are harsh words. I feel that a refusal to face this concept, however, leads to harsher living situations. If you cannot afford to live in your home, then you must find a way to afford it or leave your home, which may be traumatic if it is not on your terms. We live in a cold world; keep a good coat. Again, it is crucial that you find a way that will get you to ownership of your own home.

Okay, now that we have talked about planning out your overall budget, how on earth do you actually stay within it? The answer is, again, very simple, and will eliminate a great burden of decision-making from your shoulders. Just never buy anything you didn’t already have a plan to buy before you were poised to buy it. If you are at the store, don’t buy anything that isn’t on your list of things to buy. When you are shopping online, do not add things to your cart that you did not already have on your list of things to buy. When you are coming home from work, don’t buy food if you didn’t already have a plan that morning to buy it later. Why? Because if you try to make impulse decisions, you will have a strong bias toward spending extra money. This is because the immediate benefits of spending are obvious, but the full long term costs are complex, and you won’t think of them comprehensively if you are in a hurry to be done thinking.

The only way to avoid that bias is to avoid making the decision when you are already tired out from making a lot of decisions. Therefore, you should make all of your money decisions when you are well-rested and relaxed. To achieve this simply, compose two lists:

1) things you want, to which you will add regularly throughout a given day as impulses influence you if you even want them enough to bother putting them on the list, and

2) a long-term list of things which you have actually decided to purchase considering your budget.

On a day you have off work, review your list of things you want, and look at your budget, and then add things you want to the list of things you are looking to buy. Try to let something sit on your list of things you want for at least a week before you consider moving it to the list of things to buy, to make sure that you truly want it and weren’t just being manipulated by scientifically-engineered advertising.

Once it is on your list of things to buy, start researching prices among different competitors, and decide whether you want to get the best deal now or wait for a better one to appear. There is a lot of waiting built-in to this strategy, and that is intentional. Remember, every decision you make on the fly is probably a bad one that will throw your long-term strategy off-course. So, always have time and energy available to make very deliberate choices about money. Always give your “buy” list the time, energy, and respect that it deserves. You worked hard for your money, and you shouldn’t let somebody take it from you because you were too tired to argue, so don’t make money decisions when you are tired and vulnerable. Make a budget, keep two lists, and never buy anything you didn’t already have a plan to buy.

Section I: Building Wealth Through Financial Habits

Chapter 1: Credit and Interest Chapter 2: Rent and Ownership Chapter 3: Budgeting & Reducing Expenses Chapter 4: Bargain Shopping Chapter 5: Optimizing How You Allocate Your Productive Time Section I Conclusion

Section II: Taking Advantage of Factors Bigger Than Oneself

Chapter 6: Crash Course In Microeconomics Chapter 7: Crash Couse in Macroeconomics Chapter 8: Why Businesses Sometimes Sell At A Loss Chapter 9: You, The Savvy Consumer Chapter 10: You, The Savvy Producer