When it comes to simple, though-provoking, easy-to-read personal finance information, I turn to Michael B Rubin. He currently has two books available titled Beyond Paycheck to Paycheck and The Savings Solution. These two books are written just as though you are having a conversation with the author (whom is actually a CPA and CFP© to boot). It makes for great reading!
Why am I talking about Michael Rubin in a post about focusing on your major expenses? Well, he has a great saying in one of the books called “Major on the Major”. His main premise is that too many people focus on the small items such as driving across town to save $0.10 on a gallon of gas that they forget about the major items that could easily be reduced thus resulting in a bigger win. I completely agree with this thought.
However, please do not let my endorsement of “Major on the Major” excuse you from eliminating your bad financial habits. For example, where I work there is a cafeteria with a plethora of dining options. When I counsel clients, I find that many of them spend upwards of $20 per day in this cafeteria. Since we are no longer talking about $4 lattes here, that $20 per day just turned into a major expense ($5,000 per year eating at the cafeteria). You need to focus on these types of recurring expenses too.
Major Expenses and The Hourly Test
Major expenses can be defined in a number of ways. For example, Michael defines them as mostly items that would ordinarily need financing such as a home, car, etc.
I like to think that if you can save at least $25 for each hour of your time reducing the expense, it is major and worth spending some time on. For example, if you call up your car insurance carrier and ask about discounts, chances are good that you might save some money. How much? Well it could be $100 or it could be nothing at all. However, you will probably spend about 20 minutes on the phone with the company. If you can save $50 from the phone call, you technically are “working” for $150 per hour (20 minutes is 1/3 of an hour and thus $50 is 1/3 of $150).
Here are some expenses that I think can meet this $25/hour test:
- Cell phone contracts
- All types of insurance
- Car purchase
- Home purchase
- Electronics
- Cable bill
- Real estate taxes
- Medical bills
Shopping Around
The other day I talked to you about the benefits of shopping around. This can have an amazing affect on savings if you truly do it wisely. In my story, I spent about 1 hour calling around to several parts dealerships, warehouses, etc. for a car part that I was looking to replace. The top price that I was quoted was $350 while the lowest was $100. If I would have settled on the first quote ($350) I would have overspent by $250. However, since I bought the $100 part I essentially saved $250 for only an hours work.
If you apply your skills toward even bigger purchases you can save a ton more. By shopping around for a mortgage you probably could save just a small percentage in interest rate. However, that could have a large affect on your bank account. For example, if you take out a $200,000 30 year mortgage at 4% interest, you will pay $215,609 in interest over the life of that loan. However, if you manage to get the interest rate down to 3.75%, you will only pay $200,165 in interest. That saved you over $15,443 over 3o years!
Another tip would be to look for additional discounts before making the final purchase. J Money recently did this when purchasing a refrigerator. He found what he wanted and then searched for a coupon online. For two minutes of work, he saved $100. * * * * * Once you have “Majored on the Major” and attempted to lower all of your larger bills, you can delve into the smaller things like coupon clipping, etc. if you want. It’s just best that you find the easiest and most beneficial savings first and then you can get into the more time consuming (per dollar saved) things.
photo by: teamstickergiant