Sunday, January 23, 2011

Cost out revisited - For Nicole

In a post awhile ago (2009?), I wrote about Dave's three steps to wealth creation.  Step 2 was to review and categorize your transactions. Step 3 was to have a cost out meeting with yourself (and your spouse).  Once you have been using for a month or two, you should sit down in front of your computer and go through in detail every transaction.  If you don't know what it is, ask your spouse.  If you still don't know what it is, you should leave it in uncategorized.  You should keep working on your uncategorized category until it is less than 5% of your total spending.  The uncategorized bucket is not your friend!  One way of making sure that you know every expense is to check for new expenses every night.  Then you will not have forgotten what it was before you categorize it.  It may be seen as some as a bit obsessive, but obsession is not always a bad thing.  especially if the thing you're obsessing about is important.
Note: Using your debit card for everything will help you keep track of all of your expenses, while using cash will not allow you to see the vendor for each transaction.  There are benefits to using cash, but I lean towards the debit piece.
So, now you have your expenses categorized.  Sit down and determine if there is anything you don't need.  When our son was born in '04, we had three cars  -- two were paid for (a 99 camry and a 98 ford ranger) and I was leasing a Saab for around $330/month.  We got rid of the Saab.  It was like giving myself a $4000 raise (after taxes), so really more like a $6000 raise. 
I looked at our Comcast bill last month.  I was paying $184 for Internet, Cable TV and Home Phone.  We never use our home phone, and lots of telemarketers call it.  And I realized that for Cable TV, I only watched about 6 shows each week, and I could either get them free on Netflix (well, included in the $7.99/month fee) or buy them per episode on Amazon Video on Demand (for my Tivo), or iTunes for my iPad.  I added up the total if I bought 22 episodes/year for $2 each, for 6 shows.  It came in under $300.  So I cut off my Cable and Phone, and reduced my $184 to $39.99 for Internet.  Even if you add in the $300, my savings this year will be ($184-$40)x12-$300= $1428.  If you made that into before tax money, it's like giving yourself a $2000 raise.

Now you might not have as obviously wasteful things like these that you can eliminate from your budget, but there may be other things.  Do you drive to work?  I pay $80 for parking, plus another $30-40 in gas per month.  That's over a thousand dollars a year in savings.  How often do you eat out, how much do you spend there.  Mint should be able to tell you that.  If you use your debit card at Starbucks, you should be able to see how much you spend at Starbucks.  Some people spend $5/day, for 250 work days/year, so $1250, or just over $100/month.  Do you eat out for lunch at work?  Do you pay $1.50-$2 every day for a coke with your lunch?  Water is better for you and cheaper.  Coffee is free at work, and even better, you could give up coffee and sleep better at night. 

Ok, identify three areas where you can remove cost (take cost out) of your monthly budget. 

Next post -- reducing credit card debt!  I will try to get to this later today.


Nicole said...

Thanks Dave!

I look forward to the next post regarding credit card debt!

anthony said...

Hello Dave,
I enjoyed reading through this blog because living in the northeast I have a similar problem. The properties in my area do not cash flow..they are simply too expensive. I found you on biggerpockets and would love to pick your brain! Mainly on how you feel about your SFH's now that it's been a couple of years...the SFH's around me are no cheaper than 200k. Even if I were to find a bargain at 175k, 20% down and get 1900 in rent, it might cash flow a couple hundred bucks. After 15yrs I would've collected approx $100k in rent (4k a yr w/ 2%increases), built 40k in equity in the mortgage (on a 30yr).. so $140k.. This is the basic SFH analysis I come up with..I'd like to go multi-unit apt but like you would have to go out of my area. Would love to hear your thoughts because you are basically going down same path I plan to start now. Anthony

DG said...

Hi Anthony, you can send me a note at, or post your address. Would love to chat about it.