What would you do if you had to drastically cut your expenses immediately?
As in today or tomorrow?
What expenses would you cut?
How long would it take you to actually see that dollar reduction?
I’ve read plenty about cutting expenses to the bone, after all I am a frugalista who loves an extreme frugal living tip or two.
But many tips focus on either cutting every day expenses (easy when you know how to say no) or cutting a whole bunch of your monthly expenses. And this is my issue.
How do you radically reduce your expenses almost overnight? Just when you need to the most.
It’s All About The Plan
Part of getting your finances in tip top order is planning. Planning for the worst and hoping for the best. Not planning and hoping that everything goes according to plan.
Because it won’t, it never does.
Don’t think your income would stop overnight? Look at what can happen:
- 4,000 Enron employees lost their job overnight
- 800,000 federal government employees missed 2 paychecks during the 2019 government shutdown
- 86 staff at Friction Dynamics were sacked during a 1,000 day industrial dispute
Never mind the risk of an accident or an illness requiring a long period off work.
And you may already have worked out a survival budget, one where you are cutting expenses to the bone to reduce your outgoings as much as possible.
It’s your survival budget I want to focus on, more specifically how quickly you can get up and running with it.
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Think about all the different financial commitments you have, specifically those financial contracts you have taken out and signed on the dotted line for. Contracts like:
- Mortgage or rent
- Cell phones
- Gym membership
- Car finance
- Utility bills
- Credit card repayments
Invoking your survival budget and cutting expenses to the bone would involve you:
- Eating out less or not at all
- Buying cheap food
- Finding free entertainment
- No clothes being bought
But what about those financial commitments you are contracted to pay every month or risk having a default flag on your credit report?
Many people take out car finance over 5 years to keep the monthly cost low. Personal loans over 3 years or more are commonplace.
How would you get out of those contracts part way through if you had to drastically cut your household expenses?
Not tomorrow and probably not within a short time frame.
Sure you might be able to sell the car. But what if you are underwater on the finance? And you still need the car to get to work.
Not going to work is it?
Fear not, there are things you can do in advance to help. What you need is a ready made plan in place. A plan on HOW you are going to cut your expenses, not what expenses you are going to cut.
How To Radically (And Successfully) Cut Your Expenses
The answer to HOW to cut expenses is to have planned it in advance. It absolutely is not planning what to do WHEN the sh*t has already hit the fan.
No, it’s thinking about where you would be if your income dropped significantly overnight and working backwards to practical steps you can take today.
Think about all the financial commitments you have and think how you can cut them now. The less commitments you have, the easier it is to cut your expenses to the bone.
First things first. Ensure that the cash you have stashed away for an emergency is just that. Cash. Readily available at 24 hours notice in an easy access cash savings account.
Not locked away in a share scheme or an investment account. I know you don’t earn very much on cash savings but you need ready, easy access to this money.
Reduce Lifestyle Inflation
When you got your last big pay rise or promotion, what did you do with the extra income your received each month?
Lifestyle inflation is where, as your income rises so does your living costs. Next time you get a pay rise, don’t let it get swallowed up by daily spending.
Put it toward one of your financial goals and keep your living costs that little bit lower.
Having a few no spend days can help you refocus your spending habits.
Limit Your Monthly Commitments
Here’s how my normal budget and survival budget compared a few years ago. Notice how few monthly financial commitments we actually have.
(NB. I’m in the UK so no medical insurance)
The more regular commitments you have, the bigger your monthly outgoings. Keeping commitments to a minimum helps you to not only budget for the tight times but also to live within your means in the good times.
Many annual bills are actually paid monthly. Some with an extra interest charge of course. Car insurance, house insurance, TV licence, car tax, all can be paid for monthly or in a lump sum.
In my budgets above you can see monthly payments for 5 annual insurances (life, house, car, van and pets). We now only pay monthly for pet and life insurance as there isn’t an annual option.
The other insurances are all paid annually, thereby reducing our monthly budget by a further £105/$133.
Pay annually, upfront, and keep your monthly outgoings down low.
To save enough money to pay for these items annually we have sinking funds.
The great thing with sinking funds is that you save the same amount every month and use what is in your sinking funds as and when you need the money. No need to resort to your credit card.
Building a pantry stockpile of non-perishable items such as:
- canned food
- toilet paper
- coffee, tea and sugar
- laundry detergent
can really help in the first few weeks when you are working out how to cut your food and household expenses. The secret to making a stockpile work is to rotate the goods on a regular basis.
Related post: 30 Of The Best Cheap Foods To Buy When You’re Broke
Don’t Upgrade Your Cell Phone
Every time you upgrade your phone you are locked into a new financial contract. Upgrading does not equal getting a free phone. You are paying for the new handset via that monthly contract.
Instead of upgrading, let your contract lapse. Check your data and minutes usage and find a rolling contract that covers these.
With rolling contracts not only will you pay less every month, if needs be, you can give 30 days notice and get rid or reduce the tariff again.
Pay Off Your Debt
Carrying debt means you are carrying a monthly commitment you cannot afford to default on for many months or even years.
Car loans, credit cards, store cards, even mortgages, all are debt. The less debt you have the lower your monthly commitment is.
Increase your debt repayments now, find spare money by reducing your budget in other areas.
Consider paying off your mortgage early, not just credit cards and car loans. We paid our mortgage off 10 years early and it was like a huge weight lifted off our shoulders.
From that point on I knew we could drastically cut our household expenses if we ever needed to. Because that big monthly mortgage payment was no longer there.
Related post: 15 Things We Gladly Gave Up To Become Mortgage Free
Know Your Wants And Needs
Being very clear when the going is good about what is a necessity for you and what is clearly a want, will help you enormously should you have to radically reduce your spending overnight.
Using the 30 day rule will help you crystallize your understanding of wants and needs.
Knowing the difference between your wants and your needs means you can cut all wants straight out without agonizing over their correct category.
Insure Your Income
This comes at a financial cost but taking out income protection insurance can reduce your risks of suddenly trying to live on nothing.
With income protection insurance you do not need to be so drastic about cutting your expenses as the insurance will pay out just when you need it most.
It’s not cheap, but if you have high outgoings and a decent income it can stop your worrying about money and give you breathing space to get back on your feet when the difficult times hit.
Update Your Resume/CV
When I moved from one employer to another after 29 years it was a complete pain to create a brand new resume.
I was lucky because I was looking to move to another department within the UK civil service so I didn’t need a proper resume, only a 1 page short version. It still took me ages.
Hunting down old certificates, trying to remember which year I did what. Ages!
If you get hit with a job loss overnight the emotional fallout from that alone will make it very difficult for you to update your resume quickly.
Looking for another job is time consuming enough without have to start from scratch on a very old resume.
Keep it updated with each new career high e.g. internal promotion, new professional qualification.
Get A Second Job
Having a second income is a great way to self insure against the massive impact of losing your main income. It could be a money making hobby, a second career or something you do a couple of nights a week.
Have Readily Available Credit
Cutting your expenses to the bone doesn’t always mean you’ll be able to live extremely cheaply, you will still need money. Your emergency fund is one income stream. But having a second backup in the form of credit is useful.
Especially as lenders do not like to lend to unemployed people or those with very little income. As an example some credit cards require a minimum income level to apply.
Keeping a credit card with no outstanding balance or another line of credit is a good idea. They can be your back up plan.
They don’t stop you needing to drastically cut your expenses but they give you flexibility when coupled with the other steps above.
Successfully Cut Your Expenses
Prepare for the worst and hope for the best. Taking action now to plan how to drastically cut your expenses puts you in a very strong financial position.
One where perhaps you won’t ever need to invoke a survival budget but knowing you can and be successful with it makes for a good nights sleep.
Reminder of the steps to take:
- Cash emergency fund
- Stop lifestyle inflation
- Limit monthly commitments
- Pay annually
- Build a stockpile
- Don’t upgrade your cell phone
- Pay off debt
- Wants vs. needs
- Consider income protection insurance
- Update your resume/CV
- Have a second job
- Have readily available credit
Follow these steps and get your finances organized so that IF you had to, you could drastically cut your expenses overnight and with great success.