According to classical economics, personal disposable income is made up of savings and consumption. It says that Yd= S+C, (where Yd is disposable income, S is savings and C is consumption). It implies then that whatever is saved is your disposal income less your consumption. (S=Yd-C). This, therefore, means that in order to save more or increase S, you have to reduce your consumption, C.
In everyday language, consumption is nothing other than expenses. So, by reducing your expenses, you will be in a better position to save more.
Why Reduce Expenses?
To attend financial freedom or independence, there is a need to increase the gap between your income and your expenses. There are two ways to do that, by increasing your income or by reducing your expenditure. Experience has shown that it is much easier to reduce your expenditure than to increase your income because, more often than not, you do not have the luxury of increasing your income at will especially when the source of the income is your salary; the incremental rate of which is determined by your boss or company.
Therefore, because you have more control over your expenditure than your income, it is much easier to reduce your expenditure in an attempt to increase the gap between income and expenditure.
Prioritize your Expenses
Every effort to reduce expenditures begins with analyzing your personal financial situation. It is not uncommon to see that you are overwhelmed by the number of expenses you have to make each month. By prioritizing your expenses, you will be able to see those that you really and necessarily need to incur and those that you can avoid, without having any effect on your physical or social wellbeing.
If possible, when you prioritize your expenses, assign priority ratings to them, like high priority, medium priority, and low priority. Once you do that, it becomes easy to identify those expenses you can live without and those that you cannot.
What Should You Prioritize?
Taking a cue from Maslow’s hierarchy of needs, your first consideration should always be the basics, like food, medical care, and accommodation (rent or mortgage payment). Next, consider household expenses like electricity bill and expenses relating to other necessities that you need for your day to day living. Following directly from your needs, prioritize other expenses like a car, (car loan, car insurance, car maintenance, and gas or petrol).
If you don’t need a car to go to work because of the availability of cheaper alternatives like train or bus, then give car-related expenses low priority. Walk your way down the line of needs and assign priority ratings to them as required.
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Look for Savings Opportunities
In the process of prioritizing your expenses, you may discover that there are areas that you have been spending a lot on more than necessary. That discovery should not make you sad because you are not alone. There is hardly anyone that does not have an area or two in his or her life where he or she is spending more than necessary, including yours truly. The best way to find those hidden savings opportunities is to review each expense you listed while prioritizing them and find out if you have been prudent with such expenses.
Look for Cost-Saving Opportunities:
Having given priority ratings to your expenses, it is time to see which of them you can reduce or even eliminate. Here are a few ways to do that.
Mortgage: One of the major expenses relating to mortgage is mortgage interest. Interest rates are not always constant, they ebb and flow with economic events. The CBN from time to time reviews prime rates which drives other lending rates. If mortgage rates have fallen, try to refinance at a lower interest. If your mortgage is N15m, a 1% reduction in interest rate from refinancing, will save you N150,000 annually on interest expense.
Electricity Bill: There are one thousand and one ways of saving money on electricity in the home. Turn off the lights when not being used or when leaving the house. Unplug items that are not regularly in use like computers, printers, television sets etc. Use energy saving compact fluorescent lights instead of incandescent bulbs. Use ceiling or standing or table fans in place of air conditioners, unless it becomes exceptionally hot. If available, use dimmers and sensors on lights to control energy use.
Telephone: The cost of data and telephone in Nigeria is astronomical. Review your last telephone bill to determine your usage. You may be paying for more minutes than you need. If you have not been using all your monthly allotment of minutes, it is time to downgrade. Compare packages between carriers and service providers and make a switch if you find something cheaper. But bear in mind any cancellation penalty that may apply. Use internet calling facilities if applicable.
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Groceries: Look for coupons and if the store has discounts or rewards, take advantage of those. Look for deals of the day or week. When you go grocery shopping, stick o you list. Before you leave the house for grocery shopping, take an inventory of what you have so as not to buy then when you already have them at home. My wife always makes that mistake. We have many times discovered that we had the laundry soap we just bought, but she will always say, it does not go bad, so we keep it. That is not a good cost saving mentality.
Personal Care Cost Savings: From clothing to personal hygiene to hair care, you may be able to find ways of saving on expenses. Review your clothing expenses, if you are in the habit of purchasing new clothes every month, think of cutting back on that. Look for where they have sales and take advantage of the price reductions that come with them. Buy cloths in styles and colours that are less trendy and use accessories to create a new look for yourself. Get yourself a home manicure and pedicure and cut back on patronizing professional manicurists.
Take HomeMade Lunch to Work: The money we spend at lunchtime in the office adds up especially if you work in expensive cities. When a friend saw that a lunch of $6 per slice of pizza or $10 per lunch pack of Chinese food was digging a hole in his pocket, he resorted to going to work with homemade food of rice and assorted vegetables like sweet corn, diced carrots, green peas, lettuce, asparagus and broccoli, He discovered that the cost of buying packs of vegetables that lasted him two weeks was the cost of two day lunch packs of Chinese food. Not only has he been eating healthy, but he has also saved money.
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All Said and Done: The above list is just a tip of the iceberg, you know what you spend money on, take a critical look at them and find out how you can save a penny here and there. As the Jews always say, “every penny counts”, and the Ibo man says that “get and throway no dey make man a millionaire” so make your penny count by saving it and not throwing it away through avoidable and unnecessary expenses.