Objective of this Step:
Review and manage your monthly expense payments.
To accomplish this objective, you need to review each expense item listed on your Budget and make decisions about each one.
Although Reviewing your expenses is a little more difficult than the review you just completed of your income sources, there are still two parts to the review;
- Review the money you actually pay out each month and try to minimize it
- Review ways to reduce or manage what you have more efficiently and quickly pay down or pay off debt.
Some of the topics you should cover in your review include the following;
1. Mortgage
You may think there is little you can do about your mortgage payment other than refinancing to hopefully lower your payment. However, there are some techniques that you can apply immediately to reduce the interest you pay over the life of the loan and/or shorten the life of the loan.
Consider the following for your mortgage;
● Refinancing
● Bi-weekly mortgage payment
● Extra Mortgage Payment each year
● Extra Payment Amount each Month (Regular Principal & Interest divided by 12)
A VERY IMPORTANT NOTE:
When you include an extra amount in your payment, make sure the loan company or bank knows that it’s to be applied to principal. Some loan companies have been known to hold the payment and apply it to future interest. This would be totally useless to you in paying off you mortgage early. Mark any extra payment as “To be applied to principal” so there’s no misunderstanding.
2. Second Mortgage Loan
Use the same rules as for a first mortgage loan.
3. Credit Cards / Debit Cards
A general rule is never use a credit card or a debit card for a cash advance. If you have extra cash in any month, pay off credit card debt before auto loans and mortgages. Remember that using a debit card is taking money directly out of your account.
4. Education Loans
These loans are usually at such a low interest rate that it doesn’t make sense to pay off the balance unless it’s the only loan you have. Always pay off higher interest loans first.
5. Other Loans (Consumer Loans)
Loans directly from stores and department store credit cards for such items as furniture or electronics are generally called consumer loans. They are typically very high interest rate loans and should be avoided. If you do have some of these, they should be the first loans you put extra payments on to pay them off as quickly as possible. Avoid these loans in the future. It is better to be saving in advance for these items so when they have a big sale you have the money to buy without taking out a loan.
GENERAL RULE about paying off loans:
Always pay off the loans with the highest interest rate first. It is to your long-term benefit to pay off the higher interest loans first and fastest. Usually loans should be paid off in the following order based on the typical interest rates that are being charged, but always check the interest rates you are actually paying on each of them and rank them from highest to lowest:
1. Consumer Loans with department stores and other stores
2. Credit Cards
3. Auto Loans
4. Second Mortgages
5. First Mortgages
6. Education Loans
6. Rent
If you rent rather than paying a mortgage, check with your landlord to see if there is a way to lower your rent such as providing handyman services. You never know until you ask.
7. Groceries and Household Supplies
Before you go shopping, first, make a list of what you need. Second, use the list and try not to add anything based on in-store promotions unless you really do need the item on sale. Stick to what you need.
Coupons are a good idea too. I’ve heard of people who use coupons so effectively that they end up paying very little for their groceries. This could even be a challenge for you; to see how much of a discount you can get on your groceries each week. It takes extra time but if you have more time than money, try it.
8. Utilities (electric, gas, water, sewer)
Most utility companies have what is called a level pay plan which allows you to pay the same amount each month for eleven months and then make up any difference in the twelfth month. The eleven equal payments are usually based on the history of payments for the property so that the twelfth month is usually not a huge amount more than the first eleven months. This is a good budgeting technique.
9. Real Estate Tax
Real Estate Tax is something you can usually do very little about. However, if there is a significant change in the property, you can apply for a rebate or reassessment. A significant change may be caused by fire, water damage, destruction of a barn, etc. It has to be something that should lower the value of the property to get a rebate.
10. Insurance
● Review all of your insurance policies to see if you can save money
● Homeowners insurance
● Renters Insurance.
● Auto Insurance
● Health, Vision, Dental Insurance – entirely self paid. If you don’t have health insurance (dental and vision also) through your employer, you either don’t have any at all or you have a private policy. Because the cost of health insurance is going up so fast, there is good reason to check each year to see what you can do to lower the cost to you. Get quotes from several companies to determine if you can get the same coverage at a lower cost.
11. Cash
Cash is one of the areas where most people can save big but it requires some work. If you and your spouse and your children all get cash allowances each week, all of these should be reviewed to see if the amounts are too much. The idea is to have cash for the things you need to pay cash for but not to have so much that you start buying things for cash that you otherwise wouldn’t buy at all. I agree everyone needs some cash each week to live on.
Some areas that cash is usually used for are lunch, gas and magazines and books. If your budget is really tight, take a look at these areas to see if there is any way to save money.
One more NOTE about allowances. If you, your spouse or your children just take or get cash when they supposedly need it, then you have no allowance system and there is no incentive for anyone to curtail their spending. If you each have only a certain amount each week and you’re forced to live on it, you will adapt as you get closer to zero.
12. Miscellaneous Expenses
Gasoline
Auto Repair & Maintenance
Day Care
Alimony & Child Support
Medical Expenses (not including insurance)
Charitable Donations
Entertainment – Dining – Movies
13. Investments, Savings, etc
Savings Accounts are what you use to save for various reasons;
To balance your budget each month
Vacations
Other Goals and Events
Retirement Accounts – self paid, not deducted from your pay
Investments (Stocks, Mutual Funds, Certificates of Deposit)
For much more detail about this review step and how to do the reviews along with many tips, consider the second book in the Money Action Plan series, titled “Keep More of What You Earn”.