It’s become common knowledge to JM readers that the secret to becoming rich is — in essence — spending less than you make. We also know that the money we are able to save has the magical ability to accumulate interest and will continue compounding through our target retirement date. For me, that’s about 6.5 years away now. Being someone who intends to Retire Early, I have to maximize my monthly savings, but I also don’t want to suffer by working more than I already do. Having a family comprised of two active duty service members, an infant and a toddler doesn’t really allow for the opportunity to have additional employment. Even trying to find a few hours a week to write a blog post or two is an almost impossible task, so I’m well-acquainted with the concept of not having enough time.
Since I knew I wasn’t going to be granted extra hours in the day to try to rake in more money, I realized that I had to make our monthly expenses as efficient as possible to reduce the amount that was being automatically drained from our bank account every payday. I wanted to accomplish true expense-efficiency in a way that would have the least impact on my family. No one wants to completely overhaul their expenses overnight and feel the sudden and dreaded shackles of budgeting. When you properly perform the action of optimizing your expenses, chances are you won’t really notice a difference in your lifestyle, you’ll just have extra money lying around that wasn’t there before.
I found a spreadsheet that I had created in May of 2011 which shows our income as well as our expenses. Together Mrs. Moneyseed and I had a combined income of $6300 per month along with $2125 in bills. That means that roughly 33% of our money was being spent in bills alone. Back then we were child-free and rented a 500sqft apartment. We thought we were doing an alright job with our spending, but didn’t realize that our finances were being eaten by bills. **If you don’t track your monthly income/expenses, you definitely should. It’s pretty interesting to see how your personal money management system can change over time.
Fast-forward to June 2013 and we’ve been able to increase our monthly income to about $8800. Our living expenses have also gone up, but only slightly. We now have two daughters in daycare (this makes up almost half of our monthly expenses). We’ve also purchased two houses in Maryland in the past 2 years. Anyone that lives in Maryland can attest to the fact that houses and land are outrageously overpriced and overtaxed; which helps to make Maryland the #5 most expensive state in the Nation to live in. Even with all of our new-found craziness, our monthly bills have only increased by $235 as they currently total $2360 (around 25% of our income).
At first glance it may seem like we’re spending more now than we were back in 2011, but when we moved to Maryland in late 2011 — without any lifestyle upgrades from when we were living in North Carolina — our expenses shot up from $2125 to $3490. Literally, overnight! The drastic difference is mainly a product of the disparity in housing costs between NC and MD, which is insane.
Since November 2011, when we moved into our house in Glen Burnie, I’ve looked at the line items on our anti-budget and tried to pinpoint where we could lower expenses; I hated the fact that “cost of living” was getting the best of us. Sometimes when I’ve tried to find areas to save, good ideas have hit me like a ton of bricks, and other times I have to fish around to pull a deal out of the woodwork. Sometimes there’s just nothing you can do to lower an expense, no matter how hard you try.
The first thing we did to efficifize our expenses and reduce monthly costs was install solar panels. By adding solar panels we’ve split the monthly cost of electricity by more than 66%. Our house runs on 100% electric, and this month (June) — for example — our total energy bill is projected to be $34. It used to be $180. **Please note that this is the only instance that we paid out of pocket to reduce a monthly expense. Solar panels can be installed for FREE by SolarCity with a small monthly payment (still totally worth it).
Another area that needed closer inspection was cable/internet. Monthly we were paying $135 for cable/internet. We decided to make our house cable free; but we kept internet (of course) and through the Roku we’re able to watch better programming daily (and we don’t have to watch dumb shit like the Grand Canyon tightrope guy). Our total cable/internet costs are $68 (FioS internet + Hulu subscription). Savings? Almost exactly 50%.
Some people get pretty motivated about their small victories during the optimization process. They’ll relish in the fact that they cut back in one or two categories, but that’s usually where the motivation dies. That’s when it gets hard. That’s when you need to get creative and inspect your finances closer. For us, I realized that our insurance (car and home) deductibles were too damn low. Why would I pay a premium to keep a deductible low when I have the cash on hand to pay the full deductible in case of emergency? I called up the insurance company and said that I wanted the deductibles raised as high as they could possibly be. That had an incredible impact on our finances, but it wasn’t an obvious fix, because it’s a semi-annual bill. **Don’t do this, unless you can comfortably pay a high deductible out of pocket.
By far, we’ve saved the greatest portion of our monthly income by paying off our vehicles. My wife came into this marriage with a Ford Edge with a $575 monthly payment. Even though the interest rate was 0%, I couldn’t handle the fact that we had such a huge monthly payment for a 4,000 pound hunk of metal that takes us to/from work. And good ol’ U.S. law states that you need to have full comprehensive insurance on financed vehicles, which can add a significant amount to monthly expenses.
The only thing that remains unchanged between May 2011 and today is the monthly cost of our cell phone plan. We’ve been paying about $140/month virtually every month for the past two years. I’ve been trying to find the best possible carrier with the best pricing plans to replace our super-expensive-low-data cap-Verizon-garbage plan. I think I have one picked out, which only runs about $20/month! Holy moly! Sounds too good to be true. I’ll tell you what: I’ll do the research and I’ll give an honest review about the company and their service. If it sucks, I’ll be blunt about it.
The other half involved in optimizing your monies is to increase your monthly income. There’s a very simple way to accomplish this without even filling out one single job application. Simply, all extra money that you’ve creating in the first half of optimization should be used as a base from which more money can grow. One easy way to accommodate this seemingly impossible-sounding task is by investing your “extra money” into dividend paying indexed mutual funds. A decent rough estimate with this strategy is that for every $1000 invested you should expect about $5/month in dividends. If you were able to invest $12,000 in a year, you would effectively add $60 to your income (and this isn’t even taking compounding interest into account).
Investing should be a constant, and should only increase as your monthly expenses go down. You should look at investment money, not as money that you’re losing, or can’t touch right now; but as money that is helping you to increase your monthly income. The best part about investing in dividend paying indexed mutual funds is that while you’re invested in them, they will continue paying you dividends for the rest of your life (until you divest your money or croak).
Every individual and family is different when it comes to their monthly expenses. The things that I save money on every month may not be things that you have the control to reduce the cost of. Alternately, you may have line items where you could save money, that don’t apply to me whatsoever. I’m not trying to lay out a map here, and say “These are the things you need to do to increase your monthly income”. I’m really saying you should take a look at every monthly expense that you incur, and apply the principle of optimization to them all. Try to find small areas to cut-back your spending. If you can find $20 worth of savings each month for 6 months, you’ve effectively increased your income by $120; or reduced your expenses by $120. It’s all about how you perceive your new-found “extra money”.