Whether you are starting your first job out of college, or you are nearing your retirement date, saving money is at the forefront of your financial ambitions. Saving money is a life skill taught to everyone, but for some it comes harder than others.
Although being financially healthy and prepared is an attribution of saving money, it takes both healthy spending and saving to reach your financial goals, improve the stability of your finances, and be prepared for any expense to come your way in the future.
Hidden expenses
Hidden expenses are any expenses not explicitly stated or discussed during a transaction. Hidden expenses, also referred to as hidden fees, are normally a small dollar amount that many individuals will shrug off as part of the purchase. Individuals with excellent spending and saving habits will not only be conscious of any hidden expenses involved with their purchases, but they will actively look to find deals which represent the lowest costs, which includes minimizing or eliminating hidden expenses.
From forgotten subscriptions to high charging services, hidden expenses are present in almost every purchase made throughout a day. The first step in optimizing your budget is to understand both your revenues and your expenses.
Optimizing Your Budget
Make a list of all your expenses in a month and the cost of each. Make a list of all revenues you receive each much, and their dollar amount. Once your list of expenses you can begin optimizing your budget.
Go through your expenses and categorize them into three distinct categories by color. The chosen colors are irrelevant, but for this example we will use green, yellow, and red.
Green expenses will be any expense that needs to be paid each month. This will include monthly bills such as rent or mortgage payments, insurance, car payments, utilities, and any other bill that must be paid. The expenses highlighted in green should be your first priority when allocating revenues in your budget.
Yellow expenses will be anything that is not a necessity but is nice to have. Examples of yellow expenses could include streaming subscriptions, music subscriptions, expensive mobile phones or dining out. Most expenses that do not need to be paid each month will be highlighted yellow.
Red expenses are any of those wants that you can reasonably live without. Most often red expenses are related to entertainment such as professional sports matches or saving for a big vacation. Red expenses will be your lowest priority when allocating revenues. Oftentimes saving money for the future will trump allocating income to red expenses, especially for an individual on a tight budget.
By going through income and expenses and allocating priorities to each expense, you can have a well-rounded understanding of where your money is coming from and where it is going. Excel is useful for the color-coding technique.
Small Steps to Big Saving
Making the mistake of shrugging off small, hidden or additional fees in a transaction can lead to long-term losses. For example, you have a habit of dining out three times a week, usually fast food. When prompted with the question, “Would you like to make that a large?” you will almost always answer yes.
Although the quantity of food does not increase that much, the price of a large meal compared to the medium is an additional $1.50. Now, let’s do some math.
Over the course of a 30-day month you will have upgraded your meal to a large at least twelve times, costing you $19 a month. $19 may not seem like a life altering amount of money, but in one year you would have spent over $200 upgrading from a medium to a large meal. For many people, $200 could pay a monthly bill or buy groceries for a week.
On average the S & P 500 grows about 10% each year. Let’s take a look at what $200 would be if it were invested into the S & P 500 5, 10, 20, and 30 years ago:
| Initial Investment: | Year Invested | Value Today |
| $200 | 1992 | $3,490 |
| $200 | 2002 | $1,345 |
| $200 | 2012 | $519 |
| $200 | 2017 | $322 |
The chart above demonstrated how small expenses can add up. At the time, $1.50 upcharge for a large meal may not seem like anything to worry about but overtime the expense can have repercussions on your finances.
This sentiment is true with all hidden or small fees individuals chose to accept. Understanding where small or hidden charges occur in your regular spending can help you eliminate them and save money for the future.
Costs of Living
Being a functioning adult in society means having expenses. They are dreaded by all, and avoidable by none. For most working-class individuals, the biggest expenses in a month will relate to owning a car, owning a home, and buying food and clothes. All of these expenses are necessities and must be paid each month.
Although these expenses are an unavoidable reality, being prepared and aware of hidden costs can help lower spending and promote saving.
Costs of a Car
Owning a car means acquiring a variety of long-term and short-term expenses. Not only will you have to pay a lump-sum upfront which is usually thousands of dollars, but you will need to make payments monthly on both the vehicle and insurance. Beyond monthly payments, traveling costs go hand in hand with the price of gas. Service costs also needs to be considered periodically: before you buy, check the latest information about a specific car and its reliability.
Walking or riding a bike, when possible, will help eliminate some of the expenses involved with driving a car, mainly the gas expense. With gas prices soaring across the globe, walking when you can and driving when you have to is a simple technique to lower expenses.
Costs of a Home
Home ownership begins with a litany of hidden or additional costs. Here are some hidden expenses to look out for when purchasing a home:
- Home appraisal
- Home inspection
- Loan origination fee
- Earnest money
- Property taxes
- Escrow account
- School district taxes
- Closing costs
- Moving costs
Although some of these expenses are necessary, you can look for the best deal in your area to lower the initial costs. Also, simply being aware of these costs puts you at an advantage over most first-time home buyers.
Once you have purchased a home, expenses continue to pile. Some other hidden or additional fees to be aware of during home ownership include:
- Utilities (gas, electric, water, sewer, internet, cable, etc.)
- Home maintenance and repairs
- Homeowners insurance
- Mortgage insurance
- Homeowners’ association fees
Eliminating fees and expenses associated with owning a home is an unlikely task. Instead, look for ways to lower your monthly costs of living. This could include installing solar panels to cut energy costs in the long run, being prepared for home repairs and researching the best service for the best price or doing maintenance yourself.
Basic Costs
Grocery shopping can be one of the largest expenses, especially for a family. In order to limit expenses on groceries look for coupons or deals to save money on the food you buy. Growing a garden allows you to improve your health and your property, but also will provide you with healthy food to eat at a much lower price than if you were to buy the same fresh food from the grocery store.
Insurance costs are also a necessity for living but can quickly rack up to large expenses. For home, auto, or health insurance make sure to scour the industries to find a plan that fits you the best, for the amount of money that makes sense in your budget. Utilizing insurance fee calculators regularly can help you find the best deal.
Be Prepared and Aware
The most important aspect of optimizing your budget, identifying hidden expenses, and maximizing saving is to understand your individual financial situation with expertise. By planning a budget, you can be aware of where your money is spent and when.
Being prepared for the nuance of life is a daunting task. Not only will eliminating expenses and maximizing saving improve your financial health and stability, but it will allow you to worry less about money and more about what truly makes you happy in life.