Minimize expenses (revisited)

In my previous post on minimizing expenses, I focused more on understanding where you are spending money and shared a list of questions to ask before spending money. Here, I will identify where you can be thrifty, minimize expenses, and save money.

Minimize housing expenses

• Don't have a larger house than you need - you don't need a four-bedroom house if you're a family of two. Live in a house of the right size.
• Consider renting instead of buying. If you won't be staying put for long, rent!
  
• If you choose to buy, find the lowest interest rate on your mortgage.
• Accelerate mortgage payments if it makes sense to do so.
  
• Negotiate on rent and house price - you won't get a lower offer unless you ask.
  
• Live close to work and school if it will save significantly on transportation costs.

Minimize car/transportation expenses

• Do not borrow to buy a car.
• Consider buying a secondhand car - new cars start losing value the moment they are driven off the lot, and lose 20-50% of its value in the first year. By the end of the second year, the value may have dropped to one-third or one-fourth of the original purchase cost.
  
• Consider a sedan instead of an SUV.
• Look for fuel efficiency when buying a car.
• Keep your car well maintained - you'll save on fuel and more expensive repairs.
  
• Have only as many cars as you need (one will do for most people).
• Be a safe driver - insurance, medical care, and repairs are expensive.
  
• Check if GEICO can save you money on your auto insurance.
• Carpool to work and school.
• Take public transport - there's no excuse not taking well run public transport systems.
• Ride a bicycle or walk to work if you live close by.

Minimize other living expenses

• Interest expenses: Eliminate debt.
• Utilities: If you're not using it, turn it off. Don't waste water. Raise/lower the thermostats to reduce cooling/heating costs. Don't use the dryer - hang your clothes to dry.
  
• Groceries: Use a shopping list. Buy at Wal-Mart or discount warehouses. Use coupons. Reduce on snacks and drinks. Reduce on ready-to-eat food - buy raw and cook for yourself!
  
• Household maintenance/repair: Keep your house clean and well maintained. It costs more to make repairs (and fix the damages from leaks, for example) than keeping things well maintained.
  
• Dining: Eat out less. Pack lunch.
  
• Entertainment: Going to cinemas to watch movies is expensive - wait and rent instead (or borrow from the library). Don't subscribe to cable television. Most entertainment only provide very short-term thrills. Do something more constructive - read books (and learn), exercise (and become fitter), or talk to someone (and grow your relationships & networks).
• Social: You can be thrifty and still be sociable. Pick and choose your social events.
• Clothing: Buy secondhand. Buy on sale. Buy durable clothes. Buy clothes that you can mix and match. Don't buy more than necessary - most people wear the same clothes week after week, and other clothes are just there to gather dust.
  
• Books & subscriptions: Use the library! How many books and magazines have you bought and read once (if at all)? Only buy reference books that you will use frequently (for example, if you're a writer, the Chicago Manual of Style). Don't subscribe to magazines - read them in the library.
  
• Pets: They don't really need the gourmet food they advertise on TV.
  
• Gym membership: Do you really need it? Go for a run in the park, a swim in the lake/ocean, a game on the basketball court, etc.
• Medical expenses: Stay healthy - eat healthy and exercise. Ask for generic drugs (they are identical to branded drugs). Quit smoking. Drink less alcohol. Drink more water. Control your snacking.
• Gifts: Make your own - make it more personal and save money at the same time!
  
• Insurance: A more complicated topic than I can discuss here - but instead of universal life insurance, consider buying term life insurance and investing the savings.
  
• Vacation: Plan and making bookings in advance (often air tickets are cheaper the earlier you book them). Live in a cheaper hotel (you're not going to spend your entire day in it anyway!). Take public transport, or shop around for best car rental rates.
  

Minimize taxes

• Make contributions to tax-advantaged retirement accounts up to the tax-free limits.
  
• Take advantage of all the tax deductions and tax credits that you are eligible for.
• If you're getting tax refunds year after year, consider adjusting your income tax withholding. You can invest those money a year earlier!
• Invest for the long-term. Short-term gains are taxed more heavily.
• If you own a business, avoid taking distributions and realizing double taxation. If you're good at capital allocation and investing, consider reinvest the money through the business - it will help you focus on return on capital, build a strong balance sheet, and diversify your business's income (read an excellent article at Gannon on Investing).
• If you use Intuit Quicken, consider using TurboTax (Basic, Deluxe, Premier, Home & Business versions available) to help you manage your tax returns.

Tax avoidance is legal, do all you can to minimize taxes. But remember, tax evasion and tax fraud are illegal - don't think even about it!

Minimize investment expenses

• Avoid trading - trading costs add up.
• Invest for the long-term. Short-term gains are subject to higher taxes.
• If you are a know-nothing investor, invest in no-load index funds with low management expense ratio.
• If you can spend time identifying good investment managers, invest in mutual funds while watching out for these expenses:
• Sales load - Choose no-load funds. Sales load (doesn't matter front-end or back-end load) will eat up a large portion of your returns. With the effect of capital loss, you may probably do better with a no-load average-performing fund than a higher-performing load fund.
  
• Management fee - Look for funds with low management expense ratio (MER). If your fund has high MER, the effect of capital loss will put you at a disadvantage. Higher fees do not guarantee higher returns.
  
• Purchasing fee, redemption fee, exchange fee - If the fees can be waived under certain conditions, try to avoid the fees. For example, short-term holding redemption fee is one that you need not pay - hold for the long term.
  
• Account fee - Some funds charge account fees if your investment balance falls under a certain amount. Avoid this fee if you can.
• If you can spend time to research companies and invest in individual stocks:
• Reduce frictional transaction costs - use discount online brokers.
  
• Hold your arbitrage or workout portfolio in a tax-advantaged account, because you will probably have lots of short-term gains from such a portfolio.
• Use limit orders, especially when there is a wide bid-ask spread.
  

Ok. This is about as much as I can squeeze out of my brains for the moment. If you have any other suggestions, please feel free to post it in the comments.

Related posts:

• Minimize expenses.
• Eliminate debt.
• Accelerate wealth accumulation.
• Minimize capital loss.
  

Reference:

• Get Rich Slowly - Renting vs Buying: The Realities of Home Buying.
• GEICO auto insurance.
• CNN Money - Is Universal Life Too Good To Be True?
• CNN Money - Ask the Mole: Which insurance policy is right for you?
• Wikipedia: Tax deducations, tax credits, and tax avoidance and tax evasion.
  
• Gannon on Investing: Is Warren Buffett’s Berkshire Hathaway Worth More Dead or Alive?
• Wikipedia: Bid-ask spread.
  

## This post is part of "The Principles of Wealth Accumulation" series on this blog.

P.S. This post was featured in the Festival of Frugality #120 at A Penny Saved.

Disclosure: Long BRK.B, WMT.