Josh LanceJosh Lance

Controlling Expenditures Part II

In my first blog post about controlling expenditures, I talked about not spending money.   In that post, I broke down expenditures into three categories; fixed, fixed variable; and variable and explained what each of them entailed.  In this entry using those three categories, I want to discuss the second way to control expenditures, which is constant optimization.

#2: Constant Optimization

Constant Optimization essentially defined is looking at each your current situation and seeing where you can innovate your expenditures by cutting, changing, or eliminating costs line item by line item.   The Mr. Money Mustache blog has a great discussion regarding the principle of constant optimization that is definitely worth the read.  Here is how this practically works.  I have an example below of a budget that is broken out by the three budget categories (fixed, fixed variable, variable).  This would be a typical middle class family of four’s budget.  This family is budgeted to expend almost $63,000 annually, which would most likely mean they are expending approximately what they are bringing in as income ($63,000 in pretax dollars would be roughly $84,000).

Expenses Budget 
Fixed Costs  
Rent/Mortgage               1,600.00
Cable/Internet                     97.00
Cell Phone                   160.00
Car Insurance                   100.00
Tithe/Givings                   300.00
Fitness Membership                     32.00
Student Loan                   200.00
Car Payment                   300.00
Fixed Variable  
Electric                     90.00
Gas                     60.00
Water/Trash                     50.00
Sewer                     25.00
Food                   800.00
Clothing                     50.00
Personal Supplies                     75.00
Home Supplies                     75.00
Kid Supplies                   300.00
Entertainment                   100.00
Pets Supplies                     90.00
Doctor/Health                     50.00
Gasoline                   150.00
Dry Cleaning                     26.00
Allowances                   300.00
Home Reno.                   200.00
Total Monthly               5,230.00
Total Annual             62,760.00

So how can we use the principle of constant optimization to bring this family’s expenditures down to a more reasonable level?  Lets start with the fixed expenses.  The first line item that stands out to me is the cable/internet.  If you were to split those two services, the cable side will most likely account for $55 to $60 of the total.  The easy answer to this is to completely eliminate the cable or replace the cable with an alternative service like Netflix or Hulu Plus (or Aereo if you have access to it).  You would also want to call the cable company and see if there are anyways to save on the monthly internet costs.   If you threaten that you are going to cancel internet, the cable company will most likely offer you a deal to keep the internet around (cable companies are realizing their existence is tied to providing internet services and not providing cable services, so they will fight for your internet services).  Lets say we decided to cut cable, negotiate for lower internet service ($30), and sign up for Hulu Plus ($8) and Netflix ($8) as a replacement.  This would reduce the monthly expenditures from $97 to $46, a savings of $51 a month or $612 a year.

Some other low hanging fruit to optimize:

-Cell Phone- If you are outside your two year contract window, you can port your number (and most likely your phone) to a mobile network virtual operator (like Airvoice, Ting, or Republic Wireless) and get huge savings from what you pay with the big companies (AT&T, Verizon, T-Mobile).  In the budget example, the $160 covered two smartphone with unlimited talk and text, and a shared data pool).  Using Airvoice as an example, I can get the same level of service for $80 a month, a savings of $80 a month or $960 a year.  If I wanted to get crazy, I could make sure I only use data over wi-fi and use the Google Voice app for my talk and text when I am in a wi-fi area and cut my bill to $20 a month for a savings of $1,680 per year.  Or if I didn’t care about the phone, I could use Republic Wireless’s service for unlimited everything at $40 a month for a savings of $1,440 per year.

-Fitness Membership- Unless your gym is in walking distance to you, you are most likely driving to the gym to exercise.  You can instead, walk, bike, or run for amount of time you spending driving to and from the gym and not even need to step foot in the gym to get your daily exercise.  Optimizing this results in savings of $384 a year.

-Allowances-  This will be discussed in more detail in the next post, but the concept of allowances or fun money is really just a mechanism to spend money foolishly.  Yes, a mocha latte each morning hits the spot, but it is a very costly habit to get into (and get out of).  Removing the ability to freely spend this money may seem noticeable at first, but once you see the savings that you are accumulating by not spending money, it will become easier to stop buying those mocha lattes and find other areas of optimization.

Just by implementing these few optimizations, we can bring the total annual spending down $5,556!  But that does not mean the optimization stops.  The principle of constant optimization means we always are looking for ways to optimize.  Maybe we reduce driving for short distance trips and replace with walking or biking to reduce gasoline consumption?  Maybe we shop around our car insurance and reduce coverage levels on older vehicles to save on monthly insurance expenses.  Maybe we only buy food that provides good nutrition and cut out the foods that provide us with no real nutritional value or is highly processed to reduce the amount we spend on food. Maybe we make cuts in some of the variable expenditures to bring down the current debt outstanding so we can get to the point of being debt free and freeing up future cash flows.

Using our example budget, I went through and did some optimization to see how low we can bring annual spending down to.  Here are the results.

Monthly   Optimized
Expenses  Budget  Reductions Budget Optimization
Fixed Costs
Rent/Mortgage               1,600.00      1,600.00
Cable/Internet                     97.00 -51.00            46.00 Replace Cable with HuluPlus and Netflix
Cell Phone                   160.00 -120.00            40.00 Changed over to Republic Wireless
Car Insurance                   100.00 -50.00            50.00 Reduce coverages for older vehicles, shopped around
Tithe/Givings                   300.00          300.00
Fitness Membership                     32.00 -32.00                   – Cancelled membership
Student Loan                   200.00 -200.00                   – Paid off debt
Car Payment                   300.00 -300.00                   – Paid off debt
Fixed Variable
Electric                     90.00 -18.00            72.00 More mindful about consumption (20% savings)
Gas                     60.00 -12.00            48.00 More mindful about consumption (20% savings)
Water/Trash                     50.00 -10.00            40.00 More mindful about consumption (20% savings)
Sewer                     25.00 -5.00            20.00 More mindful about consumption (20% savings)
Food                   800.00 -200.00          600.00 Spent less on junk food and processed food items
Clothing                     50.00 -25.00            25.00 Bought clothes only when need arises
Personal Supplies                     75.00 -25.00            50.00 Bought bulk
Home Supplies                     75.00 -25.00            50.00 Bought bulk
Kid Supplies                   300.00 -50.00          250.00 Bought only when need arises, bought bulk
Entertainment                   100.00 -60.00            40.00 Chose more free entertainment options
Pets Supplies                     90.00 -18.00            72.00 Bought bulk
Doctor/Health                     50.00 -25.00            25.00 Lifestyle Changes from eating better and not driving so much
Gasoline                   150.00 -100.00            50.00 Less driving, more walking/biking
Dry Cleaning                     26.00 -26.00                   – Cleaned clothes at home
Allowances                   300.00 -300.00                   – No need to freely spend(waste) money
Home Reno.                   200.00 -50.00          150.00 More DIY, less paying others to do work
Total Monthly               5,230.00     (1,702.00)      3,528.00
Total Annual             62,760.00   (20,424.00)    42,336.00
Total Less Rent/Mtg             43,560.00   (20,424.00)    23,136.00  

$23,136 after reductions and not including rent/mtg is not bad.  If you were bringing in $63,000 per year after tax, you would be saving approximately $20,000 per year.  If you took that savings and applied it against principal to pay off your house faster (or save up to buy a house with cash only), that would get you to saving $40,000 per year.

The key with constant optimization is to continually look at your finances to see where you can optimize your situation for the better.  It takes time and it takes more of your focus on your finances, but the results can drastically change your personal financial picture.


About Josh Lance

A licensed certified public accountant (IL) and Chartered Global Management Accountant, Josh is also a family man who calls Chicago home.  Before venturing on his own with a mission to help small businesses, Josh spent his early career at a top-10 national public accounting firm before working at an ultra high net worth family office.  Josh is also an adjunct professor at Northwestern University in Evanston, IL.  He enjoys making wine at home, cooking, traveling, and cheering on his favorite football and soccer teams. Josh was honored by being selected to the 2017 class of the AICPA Leadership Academy and was named as one of the 40 under 40 in 2017 by CPA Practice Advisor.