Manipulating Expenses

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This is not a blog about an accountant gone bad!  This is a blog by an accountant who is going to openly admit, I do not follow all of the personal finance advice that most experts in the field recommend.  Today, I will share with you that my husband and I do not have an emergency fund.  I take the blame for this as the person responsible for managing our finances.  This is not an oversight though, but rather an immature belief that we could bounce back from a financial misstep, no matter what the magnitude of the set back was.

Recently I’ve been wondering, what if we had to get by on less than what we’re earning right now for a period of time?  How would we actually do that and would it dramatically impact our lifestyle?

Well, if you are sitting reading this, knowing you also do not have a safety net of funds to cushion your fall from some financial mishap, keep reading as I’ll share with you how I’ve determined I’d manage that risk until we can get that emergency fund in place (p.s. – this is one of those blogs where I share details…..talking all theoretical here is not useful to anyone, so this is a bit of a longer blog…..but you will walk away with some concrete ideas on how you could manipulate your own expenses should you be in need of cutting back financially somewhere down the road).

Before I get into the nitty-gritty though, what in the heck is an emergency fund anyway?  Well, my definition is cash that I can get my hands on quickly, that will not have a tax impact down the road.  This could be savings in a non-registered investment or cash tucked away in an off-limits bank account.

Secondly, how much of an emergency fund should one be saving?  Well, seeing as I don’t have anything, I’m probably not the best person to be providing advice on this!  But, other experts recommend at least three to six month’s savings of household income (i.e. after tax dollars, or actual cash that is brought into the household by you and/or your partner over a 3-6 month period).

Alright – now on to the meat of this post!  What if you don’t have an emergency fund and realize you are going to have reduced income for an unknown period of time?  What would you do?  Well, since I’ve recently given some thought to this exact situation, let me walk you through the plan that I came up with.

Determine how much of a short fall you are going experience.  Some of you might think the best way to do this is to assess the reduction in income – but I’m going to suggest this is not the approach to take.  Most of us spend up to our level of income, so assessing the shortfall should come from the other angle……what expenses are necessary (and I mean really necessary)?    How much money do you need to have to cover those expenses only?  Is there still a gap?  If so, go back to the expenses and be more serious about what you really need.  I bet you could find further places to cut.

I actually went through this detailed review of our expenses in order to determine how much we really needed to get by. I came up with the following expense categories. (Note that your plan will be different from mine depending on your priorities and your personal expenses…..but this is a pretty comprehensive review, so will certainly get you thinking about how you’d approach your own situation).

Non-Negotiable Expenses:

Insurances:  With a smaller cheaper car (discussed below) – that insurance might go down a bit, but all in all, our home insurance would not change, nor would our life insurance expenses, and I would most certainly not risk going without these insurances!

Property taxes:  Since we wouldn’t initially contemplate selling any property, this expense would remain as is.

Groceries:  This is one of our most significant expenses each month, but I would not try to find the cash cushion we need by skimping here because I feel we are already pretty diligent about not eating out very often and I prefer to buy high quality, whole foods over cheaper more processed foods.  Nutrition for my family is very important to me, so as a personal choice, I would not dramatically change my habits in this area.

Kid’s sports fees:  This is also a significant expense for our household, but we are already quite reasonable in what our kids participate in.  One sport in the winter and one sport in the summer (hockey and softball are their choices).  As my husband and I both grew up very active in sports within our respective communities and are now very involved with our kids sports associations, this would be an expense that I would fight to keep in our budget for as long as possible.

Recreational property: At this time, we do own a cottage where we spend 95% of our vacation time.  While others may cut out vacations in a time of financial need, I would put this property at the very bottom of the list of things to consider cutting.  I would do everything in my power to ensure we do not need to sell this property as it means so much to me and my husband.

Possible Expense Cuts

RRSP’s and RESP’s:  Obviously, not an area that would be cut first, but if needed, monthly savings by reducing or eliminating these could provide substantial relief for a period of time.  My husband and I both have excellent pension plans through work, so this outside savings is just me assuring myself I can retire at 55!  If needed, I could work longer than that.  And RESP’s are nice for the kids, but if needed, they could pay their way through school filling the gap from what they need and what we’ve already saved with a student line of credit or a part time job.  On average, this would provide us another $1,000/month.

Utilities: Since I work at a utility, I know that a huge effort makes only a tiny dent in these expenses since much of the bill relates to provincially regulated pushdowns paid for by the entire province, with nothing at all to do with usage.  However, I’d expect that with some conscious effort, we could endeavor to reduce these expenses by about $25/month by avoiding excessive use of air-conditioning/heat and actually paying attention to on peak pricing of electricity versus off peak.

Car payment: I don’t mind sharing that currently my car payment is just over $450/month.  I don’t drive an extravagant car by any stretch of the imagination, but if needed, I’m sure I could find something cheaper.   I’d plan to save about $150/month by cutting in this category.

Mortgage:  This, my friends, would be an absolute last resort in this category.  However, if necessary, I would consider extending the amortization period on the mortgage to lower the payment.  Honestly, since this would be very last on my list to look at, I’m not sure how much we’d actually save per month, but it could be something if we could stomach making that change. (Note that at this point, I’d assess our situation….if it’s a short term shortfall of cash, I’d contemplate borrowing on a line of credit with a good interest rate versus extending the mortgage amortization, but if I knew the cash shortfall was long term, the amortization period extension would be an option).

Easy Expenses to Cut

Housecleaning expense: This would save us $120/month.

Monthly donation: Gets us another $50/month.

Expensive products & personal shopping: I’d opt out of the expensive products I buy from the hair salon (although I wouldn’t colour my own hair unless in dire straits!)  There are some good quality shampoos I can get at the grocery store right?  I’d most certainly cut out any new personal purchases that were a “want” and not a “need” (and would probably revise my definition of need too). This would save me about $120/month on average over the course of a year.

Hobbies/Personal Development: I love to learn and I usually take at least one course per year that piques my interest.  I also have recently started this website and I won’t lie to you about it, it costs me more right now to keep it up than I’m making by selling my guidebooks through it.  These are two easy (although somewhat heartbreaking) cuts that I could make to tide us through a rough patch.  I estimate this would save us about $200/month.

Household extras: This would include any decorative items including annual flowers and my beloved flower bed care provider who keeps my beds looking beautiful and healthy……on average would save about $85/month.

Extra kids stuff:  That new hockey bag they want, the extra ball socks and belt, the expensive Birkenstocks they will grow out of by next summer…..this would save me lots…I’m going to guess about $100/month.

Allowance:  If we had to, this could be cut back.  The kids would understand extras now include hockey registration, so paying for household chores and babysitting each other would no longer be a go…….this would probably save me on average $60/month.

Phone & Cable:  I’ve often thought our home phone is a waste of money anyway since my husband and I typically exclusively use our cell phones and the kids can text or FaceTime their friends for play dates.  Our cable package could most certainly be reduced to basic and I’d be okay with cancelling it entirely given how much we use Netflix in our house.  This would save us about $120/month and wouldn’t be too painful for me……the rest of my household…. now that’s another story.

I may have just proved (to you and myself) that I live a rather cushy lifestyle, and while I take comfort in knowing there are a multitude of ways I could manipulate my expenses to attempt to accommodate any financial mishap that may come up for us, I no longer feel comfortable moving forward without some other emergency backup plan in place.  No one wants a drastic lifestyle change forced upon them because of unexpected financial woes……so, new to my financial formula will be savings for an emergency fund.  How about you?

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Whew!  That was A LOT of info!  But this is how I roll folks.  If I'm going to make some suggestion to you about something you might want to consider for your formula, I'm certainly going to have thought it through myself as it pertains to my own formula!  If you like my detailed style and the honesty with which I speak about personal finances, check out my guidebook "How to Create a Budget That Includes Guilt Free Spending on Fun!"  I guarantee that together we'll come up with a personal financial plan that you can feel good about!