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Do You Need a Budget?

Cutting Back When Necessary

In the interests of improving your bottom line, it may be necessary to cut back on your spending. As a quick review, there are different types of expenses.

Money Morsel

Expenses can fall into more than one category. A routine expense, for instance, may be fixed or variable. If you lease a car and pay the same amount every month, that's a routine, fixed expense.

Don't Go There

When looking to reduce expenses, begin with moderate cuts. Don't decide, for instance, that you're going to reduce your food bill by 50 percent all at one time. Start at 10 percent, and see how that goes. Trying to cut back too drastically at one time may cause you to get discouraged and give up trying to save.

  • Routine expenses. These are the ones that get you at regular intervals. You can count on routine expenses. These include the mortgage, insurance, taxes, groceries, your health club fee, and your utility bills.

  • Nonroutine expenses. Your car breaks down and you've suddenly got to come up with $425. Your 22-year-old has a once-in-a-lifetime chance to spend a semester in France, and she needs $1,575 right away to reserve her spot. Your wife gets a promotion at work and you spend $200 celebrating at the best restaurant in town. These are nonroutine expenses. They don't come at regular intervals, and that makes them harder to plan for.

  • Fixed expenses. If expenses are for the same amount every payment period, they're called fixed expenses. Your mortgage, insurance, and health club fee are all fixed expenses.

  • Variable expenses. You probably don't spend the same amount in the grocery store every week. And some months you pay out twice as much for dinners in restaurants as other months. These are variable expenses. You know that you'll have them, but the amount that they'll cost you varies.

  • Nondiscretionary expenses. These are the ones that you can't get around. You've got to pay them. They include insurance, your mortgage, utilities, food, and so forth.

  • Discretionary expenses. You need to buy food, but you don't need to spend $45 a month to belong to a health club. You could, after all, take up jogging. You need to pay your insurance bill, but you don't need to spend $2,000 on a vacation. The health club, vacations, movies, restaurants (all the fun things), and so forth are discretionary expenses.

If you're like most people, it's easier to cut spending on variable expenses than nonvariable. If your mortgage is $1,500 a month, you have no choice but to pay $1,500 a month if you plan to continue living in your house. If you're spending $400 a month on food, however, there probably are ways you could reduce that bill.

Use manufacturer's coupons, or buy generic or store brands instead of name brands. Trade in the Chilean sea bass for flounder, and find some good recipes for rice and beans or pasta. Buy only what you'll use that week, even if a particular item is on sale.

Other variable expenses that usually aren't too difficult to reduce include discretionary expenses such as vacations and entertainment. That's not to say you should give up your trips, movies, and dinners out all together. After all, you've probably been working hard for 20 or 30 years now, and you certainly deserve some fun. If your net worth isn't what you'd like it to be, however, you might consider trading the cruise vacation for a week in a little cabin on a lake. Or your ski vacation in Aspen might be reduced to a couple of days at your local slopes.

Some fixed expenses you may be able to reduce or eliminate include ones such as the monthly gym fee, the $150 or so that you spend in restaurants each month, and the $70 tab you run up on your hair and nails at the beauty shop every six weeks. You might reduce your car lease payment by trading in the Lexus for a Honda.

Once you really think about it, you'll probably come up with many ways to cut your expenses. Look over the budget worksheet and see which areas seem to be the best candidates for cutting back. Come up with a plan on how you'll save, and put your plan into action.

More on: Family Finances

Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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