One of the best strategies for achieving financial freedom is to save money and reduce expenses. There are many different ways to do this. Everything from small efforts to save money daily to major lifestyle changes that can significantly reduce expenses. My first steps to financial freedom involved taking control of my expenses. In this post I will expand on the detail of where and how to save money and reduce expenses.
With an open mind there is no expense that you cannot reduce significantly. We become so fixated on our lifestyle and how we have done things in the past that it seems like it will be impossible to reduce some expenses. If you look at some really frugal and minimalist lifestyles you will realise just what is possible. With the right mindset and if you can detach yourself from status and material possessions then the sky is your limit. I love this idea but I am not quite there yet, but it is good to know what is possible.
Save money on housing
Housing normally makes up the biggest portion of your expenses and is a huge opportunity for saving money and reducing expenses. The bigger and more fancy your housing is the higher everything else related to it is. It affects your bond, insurance, levies, rates, electricity, water, maintenance, gardening, cleaning and then you need to furnish it.
The ideal situation is to think about all of these things before you buy. Ideally you would buy a property that you can comfortably afford the bond payments and pay in extra. The property would be just big enough with no wasted space thereby saving you lots of additional unnecessary expenses.
That was not my situation I already had a house that I liked and I did not want to disrupt my lifestyle and family. The option to move into a smaller more cost effective house we will consider at or after retirement. So I considered the other options.
Pay off your bond faster
The biggest part of housing cost is the bond or rent payments each month.
Lets look at an example of how much money you can save on a bond of R 1 000 000 if you pay it off sooner. At a rate of 9% over 20 years your monthly premium will be R 8 997 and that home will cost you R 2 159 342. That means that you will be paying interest of R 1 159 342. So you are paying more interest than the capital value of the house.
If you increase your monthly premium to R 12 668 (an increase of R 3 670) you will pay the house off in 10 years. The saving will be R 639 233, that is almost another whole house. That is a massive saving.
On my bond I made sure that I had the best rate that I could possibly get by moving my bond to a new bank to get a lower bond rate. Then I made it my focus and mission to pay off the bond as quickly as possible.
This saved me hundreds of thousands of rands in interest. I paid the bond off in half the time, 10 years instead of 20 years. The way I did this was to take all the savings that I talk about in this post and put it into my bond as well as anything extra that I got. We also held off on temptation to do changes and alterations by not using the access bond. See my post on eliminating debt to become debt free.
Reducing house expences
My next biggest house expense was electricity. Being on a rural electricity rate meant that my cost was around R3000pm and half of that was a fixed portion. The ultimate goal was to get off the grid to solar. Initially, I got savings with a geyser blanket and a geyser timer. Then when my geyser needed replacing I put in a heatpump and then after that I put in a solar geyser. The oven and stove were changed to gas.
The final step was to convert to solar, my calculations showed that I would get at worst a seven year payback on a solar system with a 15-20 year lifespan. I funded this with my access bond. Almost overnight I reduced my monthly expenses by R3000pm.
On the house insurance I saved a few hundred rand a month by increasing my excess. That meant that I would only be covered for large events. For smaller amounts less than R10 000 I could use my access bond in an emergency or my emergency fund later.
For house maintenance, gardening and cleaning we reduced the number of days and services that we were paying for. By doing more of the work ourselves we saved just over R1000pm.
Saving Money on Transport
Transport can be a huge expense that people think is unavoidable. If you organised your life better you could manage to reduce transport to almost nothing. Our car and suburb culture has meant a disaster for the average person. Essentially the worst combination is a big fancy house far away from work with a long commute that needs an expensive comfortable car.
Imagine a smaller comfortable home close to work that doesn’t need a car, you could save a fortune. The more you drive the greater the fuel cost, maintenance, insurance and the quicker the car value drops and the sooner you need a new car.
A large portion of our cost was my daily commute of 120km to work and back. So I did what I could to work from home more and then eventually to get a job closer to home. This worked out well and being a cyclist I have also manged to bike commute to work 1-2 time during the week. This cut my transport expenses by more than half saving about R1500.
My wife has also moved to more work from home with a goal to be completely home based (happened sooner than later thanks to COVID). In addition we also became more mindful about taking unnecessary trips. Just by planning better especially on weekends we managed to share trips and not duplicate.
Buying a used car vs new car
Cars are expensive, the cost of ownership and maintenance is the biggest cost. This is a massive opportunity to save money. Just by buying a good quality used car vs a brand new model can save you hundreds of thousands of rands.
Lets look at an example where you buy a new car every 5 years vs buying a used car and keeping it for 10 years. For these calculations I used the average car costs from the Wesbank mobility study.
If you buy a new car every 5 years the after 10 years it will have cost you R 1 032 742. If you bought the same car as a used model less than 4 years old and kept that for 10 years it would cost you R 462 955. That is a saving of R 569 786. In this calculation, I even assumed double the maintenance cost for the used car. The bottom line is the less you spend on buying a car the less you stand to loose over time.
Both of our cars were bought as used and are paid off and we have not replaced them, they are 11 and 13 years old. We maintain and look after them and will only consider replacement when they are unreliable or unsafe. This saved us around R5000pm
Having youngster in school however does play havoc with transport costs. So this is a bit of a challenge now but at least we have all the other savings banked.
Insurance is one of those costs that can get out of hand because you can insure anything. The more you buy and own the more you will have to insure. So not only is there a cost for buying more stuff and expensive stuff, but it will cost you more to insure it all. That is one of those benefits of minamilisim that just happen without us even realising it.
It is even worse when you are living below your means because then you have no room to move so you rely heavily on insurance. You need to work to a position where you can stop having insurance for everything and only insure large items. Rather save that money yourself in an emergency fund.
How to save money on insurance
The main insurance costs for us are life insurance, car insurance and home insurance. The principle that I follow with insurance is to only insure major losses and larger items. For smaller items like bicycles and cell phones. I rather keep emergency savings. Also for the larger items I have increased the excess amounts for cars and home from around R1000 to R10000. This has the effect of significantly reducing the monthly premiums saving about R500pm
As an example a couple of years ago I lost my new iphone, it was only 6 months old. So what I did was not to buy the same new model instead I bought and older model for half the price. The other option is just to use an old phone that was replaced, we all have one of these lying around, I have done this the past.
Review your insurance every year. For the last 5 years I have had my insurance decrease every year. I have done this through a combination of not accepting increases and shopping around for better quotes. There are many extras added to a policy so make sure you do not have any cover that is not adding value.
For life insurance make sure that you are not double insuring. Your company benefits may be covering this and it could be significantly better than what you have privately.
As you get older your retirement savings increase. If you have good life cover from an employer you will be able to decrease life insurance. Rather channel that money into your own retirement savings and insure yourself. We have saved about R1400pm here.
Recurring monthly costs
Recurring monthly costs are so dangerous for two reasons. Firstly they keep on recurring regardless of whether or not you use the service or product you are paying for. Secondly they appear small every month but they add up over time. A quick way to calculate what this monthly expense is costing you over a 10 year period is to multiply the monthly payment by 163. So a R199m gym membership is costing you R 32 437 over 10 years.
Check these quick calculations at different inflation rates for converting monthly expences to a 10 year cost.
|Inflation Rate||Multiply monthly expense by|
The biggest culprits are gym contracts, DSTV, data contracts and many different online services. The first question to ask yourself is are you using this all the time, are you getting the value, do you really need it and can you do without it. If you look at the cost over 10 years it puts things in perspective and will make you think if this is really that valuable to you.
The recurring items that I stopped were gym membership, Discovery Vitality and some data contracts. Items that we reduced were DSTV package and data contracts. Total saving here was about R1500pm.
Recurring costs don’t only have to be contractual they can also be habits , daily, weekly or monthly purchases. Things like daily lunch and coffee come to mind. Be mindful of these, no need to deprive yourself but also don’t be wasteful. Don’t think that small amounts won’t matter, they add up. Often if you don’t know where your money is going you will find it in these small amounts.
Saving on cellphones
Cellphones and data costs willcost you a fortune if you don’t manage it properly. The phones themselves are very expensive if you always want to have the latest and greatest model.
I used to do this but came to my senses. Now I keep the device for as long as possible, ideally up to 4 or 5 years. Typically I have used iPhones and managed this by replacing the battery after 2 years. Or when I replace I don’t buy top of the range, rather get one of the slightly older models. This saved me about R500pm.
I have also been careful using data and rather rely on home and work wifi for the bulk of data use. That means you can manage with an average sized data contract. After wasting money on out of contract charges I now use top up contracts. That way you will never get those unexpected out of contract charges, much better to control.
Save money and reduce expenses to free up cash
These have been the main areas where I have achieved savings. Before I did this I felt like I did not have enough money to be able to settle my debts quicker. However once I analysed and tracked my expenses I was able to find these areas of saving.
My effort to save money and reduce expenses increased my monthly cash flow significantly. If you add up all of the expense savings it totaled about you R 13 900 pm. I used these savings to increase my bond payments. This allowed me to settle my homeloan in half the time. Once I had achieved this then I could use all of those savings to start investing properly.
I have never stopped looking for ways to save money and reduce expenses and am continually looking. Every year my goal is to decrease our expenses. Some of the expenses will go up due to inflation. A focused effort to reduce them continually increases the gap between earning and spending. This results in increased investments and net worth.
Here I have covered the main expenses and those that recur every month. These are often considered as fixed expenses that you cannot change. But clearly there is a hige opportunity to save money and reduce expences for these items.
Have these changes deprived me and made me live like a pauper. Definitely not, yes they required change and adapting but nothing major. I haven’t even spoken about the variable or discretionary spending that can be looked at. This is even easier to change.
You shouldn’t take any of this as advice, consult a professional financial advisor for that. This is merely what has worked for me and my experience, so what has your experience been? How have you managed to save money and reduce expenses?