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Thursday, November 1, 2012

Setting up a budget: keeping an open mind with fixed vs. non-fixed expenses

(I received some feedback after last week's post on how we budget at our house. It seemed good, so I'll continue with this post, and in following weeks.)

When most of us think of our budgets, we tend to think that some items have a fixed cost, like housing, food, and heat. The truth is, in almost all sections of a budget, these items are more flexible than we think. Let's take a look at these three areas.

The cost of housing
For example, if you absolutely want to stay in your current residence, and not do anything to negotiate a change in monthly costs, well then, yes, this is a fixed cost. But lets think outside the box for a bit.

If you own your house, but currently have a mortgage on it, with a high interest rate, you can refinance your mortgage at a more favorable rate. I have a friend who very recently refinanced their home. They'll be saving a couple of hundred dollars per month, with a very short (I think it's 6 months) pay-back period to pay off the points and fees of the refi, and will continue to save for 15 years, which by the way shortens the life of their mortgage by several years.

If you're a renter, aside from moving to a new rental, you may be able to reduce your rent by negotiating a lower rate. My husband and I lived in a rental for 6 years. During spring, summer and fall we paid a lower rent than winter. How? We offered to do the yard work at our tri-plex in exchange for a reduced rent in those months. There could be the opportunity to do maintenance, yard work, or repairs, in exchange for reduced rent.

You can take in a boarder/roommate and apply their rent towards your mortgage. I know an empty-nester single mom, who lives in a college community. She's still in her 3 bedroom home, but takes on a student during term. (She very carefully screens her applicants, and will only take someone who comes on recommendation from a friend.) Her tenants pay enough to cover all utilities, groceries, and homeowner's insurance for the months that they're living with her. In exchange, she's been allowed to continue as an artist, creating her pottery and teaching classes, without worry of how she'll pay the bills.

If you rent or are in a position to easily sell your house, you can trade down for a lower mortgage payment/rent. I once read of a family here in Seattle that wanted Dad to give up his high-powered executive job so he could have more time with family. One of the things they did was to sell their grand, 5 bedroom micro-mansion home, and buy a small 3 bedroom bungalow.  This alone was enough to allow the dad to take a significant cut in pay, take a part time job, and have free time with family.

Imagine if you pursued any two of these possibilities, you refinanced and took in a roommate, or traded down and took in a boarder, or performed work at your rental in exchange for reduced rent and took in a roommate -- you could shave a substantial amount off your housing cost. I'm not saying you'll want to do any of these things. They're just possibilities.

The cost of food
The cost of food is not so inflexible. We've all had one of those weeks when we didn't feel well, so didn't go out shopping and instead made do with what we had on hand. As a result our grocery bill was lower for that period, and yet the following week, we likely did not spend double the usual amount to compensate for the low-spend week.

Or, we've had a grocery shopping excursion on an empty stomach and bought everything in sight, especially those items that are ready-made and more costly. In that case, our grocery spending was much higher than usual, and yet, the following week we didn't under spend simply because we overspent the previous week.

Or, we've gotten into the habit of shopping in one of the upscale markets and spent way more than if we'd shopped in a budget store. Or we were name-brand loyal, or didn't make a list, or didn't check the sale flyers -- all circumstances that can drive our grocery bill up.

If saving on food is a priority to you, there are so many strategies to reduce grocery spending. A lot of personal finance blogs seem to specialize in grocery shopping tips.

The cost of heat
You may think it just costs a set amount to heat your home. Well, yes, if you are unwilling to make any changes at all, the cost will be the same year after year. But here are just a few ideas that could help shave that heat bill.

Use weather stripping to seal doors and windows. On older windows apply plastic sheeting to serve as a storm window in winter.

Make a draft snake.

Use insulating curtains.

Install (or simply learn how to use) a programmable thermostat.

Change the settings on your thermostat. Set the heat 1 degree cooler for the night hours. Have the heat set to come on 15 minutes after you return home in the evening. (If your thermostat is anything like ours, setting the heat to come on at 6 PM actually means it will begin the heating up process about 20-30 minutes before 6 PM, and have the heat guaranteed by 6 PM.)

Install a wood stove.

Change your heating fuel. Look into the cost differences between electric, natural gas, propane and oil. Just because you have forced air now, doesn't mean you have to keep forced air. I know some folks have switched from forced air natural gas to individual room, hard-wired electric, and saved money. It all depends on the cost of utilities in your area and how much of your home you use daily.

Use a different door to come and go in your house. That sounds crazy, I know! But in our house, the front door is near the thermostat. Every time someone opens that door in winter, the temperature near the thermostat drops and increases the frequency of the furnace coming on. By changing our family's coming/going door, we keep the furnace from popping on every time someone uses the front door.

To get to the back yard or deck, we have a couple of options in our house. We can use one of the deck doors in the family room and office, or we can go through the garage back door. I've been using the garage back door for the past month or so, as going through the garage seems to allow less cold air into the house, than one of the deck doors. The garage serves as a mud room, a buffer between heated and outdoor space.

Insulating ductwork. Our house is on a crawl space. A few years back my husband discovered that the insulation on several of the ducts had been removed. He took a few Saturdays and replaced it.

Insulating the attic. They say this is one of the best returns for your money, when it comes to saving on heat. If you have attic space that is not insulated, this is a great project to tackle. (Which reminds me to talk with my hubby about a spot I discovered last year. When we had a contractor out to do some work, he'd forgotten to roll out the insulation over one portion of the attic. The insulation is all there, just needs to be rolled out. I'd do it myself, but would require a special mask for my allergies.)

Now that we've seen many areas of our budget are really more flexible than we'd previously thought, what expenses are truly fixed?

Taxes -- I know you can do all sorts of things to reduce your tax burden, charitable donations, have another child, buy a car (to deduct the sales tax), but for the most part, as this is not a tax-reduction blog, let's just assume that taxes are more fixed than not. And I'm including property taxes along with income taxes here.

Medical costs -- unless you plan on performing your own appendectomy, the cost for surgery is not so flexible for most of us. But what you can do is take the best possible care of your health, and hopefully not need to use the services of the medical community as often, or need to purchase as much prescription and/or over the counter medications. (Just an FYI, this is based on what I know of US medical care and costs.)

And in medical costs, I include insurance premiums, as many of us really do require specific coverage from our insurance. Sure we could save by downgrading our coverage. But for us it might be penny-wise, pound-foolish. Cheaper insurance might mean higher out-of-pocket costs for a lot of folks. 

(this one's a maybe) Car registration and driver's license fees -- now obviously you can give up your car (or trade down) and stop driving altogether, and that would either reduce or eliminate these fees. But for most of us, these aren't options we're willing to pursue just yet. Though I do have to say, if times were really tough, I could definitely see us scaling back to one car, and just making do. And for many folks who live within walking distance of most services, ditching the car is an option.

Necessary home repairs -- I'm talking fixing that leaky roof, repairing a broken window, replacing a rotting deck with something safe, not dream kitchen makeovers. You don't need to go all out and hire the most expensive contractor for the most expensive project. You can compare quotes, and ask around for alternatives that might also work in your circumstances.

The categories in our budget
So, I am looking at my current budget. Here's a list of all the categories:

Taxes, property
Insurance, vehicle and homeowner
Auto registrations and driver's license fees
Gifts & celebrations
Tuition, for daughters' school
Gas for cars
Non-food household purchases (cleaning supplies, bath tissue, toothpaste, detergent, etc)
Garbage collection
Church tithing
Home repairs/services
Car repairs/maintenance
Landscape and interior design
Clothing and hair
School supplies, fees
Entertainment, eating out, excursions
Emergency fund
Dance classes
Savings for a new computer

Everything we spend either comes out of one of these categories, or is paid through my husband's employer (medical insurance, his bus pass, life insurance).

You may notice there's no category for car payment, mortgage, cable, or internet. We're debt-free, use an indoor amplified antenna for TV, and my son pays for the internet service as he requires it for his work.

So, looking at all these categories, almost all of them have some wiggle room. I could negotiate cheaper dance lessons, by offering to man the reception desk a few hours per week, or hire myself out for their cleaning services.

I can plant swap with friends to increase the beauty of our landscape. I can thrift shop for clothing. I can have the cheapest phone service available (prepaid cell phones are an excellent way to have cell coverage cheaply. An iphone is not a necessity.)

I can turn off lights, take shorter showers, combine all errands into one drive, do it myself car maintenance, make my own laundry soap, barter with my daughters' school for lower tuition (they have a cafeteria, I could ask for a job cooking for a reduction in tuition), take fewer vacations, wear a sweater indoors, eat out less . . . the list of ways to cut back in almost all areas of spending is endless.

My point in this post, is to emphasize that most of our spending is not fixed. Approach building your budget with flexibility in mind. You might surprise yourself how many categories you could reduce your spending in. And I'm not suggesting that you cut spending in all categories, Hopefully last week's post on determining goals and priorities helped to think through what really matters to you, and what doesn't.

Next week's post on budgeting -- setting up a timeline for goals and working them into your budget. (See, last week's exercise in setting goals and priorities was not purely academic!)


  1. I like the way you think! Good food for thought.

    1. Hi Janice,
      Thank you. How's your budget-structuring coming? Well, I hope.

  2. This is a most excellent post! I sort of go crazy when I spend too much time on the "frugal living" blogs, because it always seems to me that people spend an inordinate amount of time and energy trying to save a few pennies here and there, all the while ignoring big ticket items like enormous mortgage & car payments because they assume these things are "fixed."

    It's always seemed to me that if you take care with some of the big decisions in your life, you end up being "frugal by default" which just makes it soooo much easier!

    1. Hi Cat,
      Thank you. I have a friend who is constantly telling me to work smarter, not harder. And I think when you address big spending areas, you're working smarter.

  3. Thanks, Lili! I love it when people think creatively to solve their problems. :)

    1. Hi Kris,
      Thank you. I've been fortunate to be in the position to witness a lot of people solving their problems very creatively. I've learned a lot from these folks.


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