Money

Cost Cutting Round 2: Back to Budgeting Basics

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As I explained last month, the double-digit market decline last year coupled with high inflation has been a wake-up call to review our budget and make sure we aren’t throwing money away.

Earlier this year, I started up Quicken, ran expense reports for the last few years, and flagged some areas of concern.

In my last post I explored what I was doing to save money with our savings account, cable, and cell phone providers. In this article I’ll explore the balance of my budget review — some of the other items likely to produce savings or reduce waste for us.

If you’re in cost-cutting mode too, perhaps this will give you some inspiration. And if you have additional ideas for cost-saving measures, please add them in the comments below!

Let’s start on the income side with a couple of simple possibilities for increasing cash flow:

Investments

The expense ratio on your investments—what you pay in management and custodial fees—remains the primary investment return variable under your control. The profits on your portfolio only begin after your advisor (if any) and custodian get their cut. Research shows that over the long haul, your investment expenses are a major determinant of your returns.

Along those lines, don’t forget about the potential for lower-expense share classes at some investment companies. At Vanguard they’re called Admiral shares. If you can invest over some threshold (only $3,000 for most of their index funds), you’ll typically make a few hundredths of a percent more each year, which could add up over time with large sums invested.

eBay

Many of us have closets and garages full of unused possessions. Even an obsessively organized person like me can easily accumulate too much (neatly arranged) stuff over time.

I upgraded my backpacking kit over the past year and spent a month this fall selling off unused or outmoded camping gear using eBay auctions. I made hundreds of dollars while putting that equipment into the hands of people who could enjoy it, rather than having it gather dust in my home.

Over the years, I’ve sold dozens of items on eBay and I’m usually amazed at the prices I get. With few exceptions, it feels like a seller’s market. Especially for specialized or technical items, eBay is a considerably more profitable venue than a yard sale or Craigslist. I usually get more than 50% of retail on used items, and sometimes get much more than that.

For a successful auction on eBay, it’s important to communicate clearly to buyers what they are getting. Post lots of sharp photos, from all angles, of the item both packed and set up for use. Include a detailed textual description and specifications (size, weight, color) too. I’ve had no trouble with borrowing manufacturer’s original product descriptions, though I usually edit them. Don’t forget to describe the condition of the item, as well as listing the original retail price, so buyers can visualize the value they are getting.

I recommend taking some risk and pricing your items low, maybe 25% of retail, to attract interest from bidders. Once you have a half-dozen people bidding against each other, you will likely receive a fair price. I’ve only sold much lower than expected a few times.

To keep my life simple and drama-free, I don’t accept returns on eBay sales. I include enough information that buyers can fairly assess what they’re getting. And eBay offers its own buyer protection. I also ship only within the United States.

Selling on eBay takes time and costs a bit. It’s ideal for small, valuable items like electronics or sporting gear. Everybody has their own threshold, but I don’t usually bother for items worth less than about $25, or large items that would be difficult and expensive to ship. Those things are donated to Goodwill or put on Craigslist.

Now let’s move to the expense side and consider ways to reduce costs:

Recurring Expenses

One of my very first posts on this blog, way back in 2012, explored the critical impact of recurring expenses: “Why a Dollar a Day is Really $9,000.” The issue is encapsulated in my “Rule of 300.” Read the post for details, but the upshot is that you need to save roughly 300 times any monthly expense in order to fund that amount from your investments after financial independence. So, any kind of monthly commitment has an outsized impact on your long-term wealth.

But, in recent years, I ignored my own advice and allowed some unnecessary subscriptions to accumulate: two music streaming sites, several newspapers, and miscellaneous Internet services. Cancelling these to reduce our monthly cash outflow was easy and hasn’t impacted my quality of life in any measurable way.

Given the sorry state of today’s news, I’m enjoying just skimming the headlines without having the option to read further!

Groceries

Our grocery bill is a perennial standout in our monthly budget. And not in a good way. We like to eat healthy and we like to eat well and that can be expensive in today’s world. We also lump dietary supplements and household consumables in with groceries and those items aren’t cheap either.

For starters, we’ve been reviewing our grocery list for overly expensive and possibly non-essential items.

Organic produce is a good place to begin. If you want to eat organic, you can get more bang for limiting organic purchases to fruits and vegetables known to be high in pesticides: EatingWell offers a list as does Consumer Reports.

A time-honored approach to saving on food is to shop sales and deals, planning your menus around discounted groceries, rather than planning your grocery shopping around your menus. Eat what’s cheap for the season.

Lastly, it’s all too easy to waste food. Impulse purchases are made in the grocery aisles and later forgotten. Fridges and pantries get cluttered and the items in the back grow old. The U.S. Department of Agriculture estimates that 30-40 percent of the food supply in the United States is wasted each year. In a world where many people want for basic nutrition, that’s a moral failing as well as a huge financial loss to each of us.

You can reduce waste by organizing your food by date and periodically scavenging your fridge and pantry for items that need to be eaten soon. Pull them to the front or leave them on the counter where you can’t forget.

Also, some of us stockpiled food during the pandemic scare. But stockpiling is expensive. It amounts to investing money into a depreciating asset. Even worse, if you don’t cycle through your stockpile regularly, you wind up throwing out food. Preparedness is good, to a point. We’re trying to limit any stockpiling to modest quantities of staple items that we can easily manage and eat as part of our normal diet.

Finally, know that the majority of food expiration dates can be safely ignored. Such dates were primarily intended to convey information about an item’s quality not it’s safety. So expired items might not look or taste as fresh, though even that decline could take a while. A good rule of thumb according to one expert is that “anything destined for the stove or oven is safe past its expiration date, so long as it doesn’t smell or look odd.” That’s because cooking kills most pathogens. The few items where expiration dates really matter include infant formula, ready-to-eat products such as deli meats, raw fish, sprouted vegetables, and unpasteurized milk and cheese.

Insurance

We spend more than $13,000 annually on insurance: auto, health, homeowners, and umbrella. Health and umbrella insurance are topics unto themselves, but for this post I want to focus on cost considerations in auto and homeowners.

Coming from a military family I’ve had my auto insurance with USAA since I started driving. It was only natural to continue with them when later we bought our first house and later still when our net worth reached the point that umbrella insurance was advisable.

In general I’ve been happy with USAA. They generally get strong reviews for good customer service, advanced technology, and reasonably-priced rates.

Unfortunately, in recent years, I’ve experienced less reliable technology and less knowledgeable or friendly customer service at the company. It hasn’t been bad enough for me to yank my business, but it has encouraged me to shop around without guilt. If USAA is becoming a more average organization, maybe I’ll just go elsewhere for the lowest rates.

Almost immediately I came across the U.S. News Car Insurance Review which gives USAA the No. 1 spot for car insurance thanks to high approval scores from customers and the “lowest car insurance rates for most drivers.” Since generating insurance quotes is a laborious process, I decided to take their word for it. Maybe USAA is the best I can do in auto insurance.

I decided to focus instead on homeowners insurance, where USAA appeared to be somewhat less competitive. Our annual premium of $1,900 felt and sounded expensive compared to averages I read online.

So I generated online quotes from three other insurance companies: Farmers, Progressive, and State Farm. There are so many variables in a homeowners policy that comparisons are difficult. I focused primarily on dwelling coverage, replacement coverage, personal property, personal liability, and deductibles. Bottom line, based on the online quotes, USAA was most expensive followed by State Farm then Progressive then Farmers. The Farmers online quote was less than half the cost of USAA!

I called both USAA and Farmers to verify the details. Unfortunately the national Farmers agent couldn’t access my online quote and when we generated a new quote, trying to match the USAA coverages, it came to more like two-thirds of USAA’s premium. And that was without a couple of necessary coverages that Farmers told me I would have to get quoted by a local agent. When I finally got through to the local agent, he couldn’t retrieve either of my previous quotes, so we started the interview process all over again. When the dust cleared, I was offered a gold-plated policy quote that significantly exceeded my existing USAA coverages and premium. That wasn’t my objective, but I was ready to be done with insurance quotes.

Based on my experience it seems that online insurance quotes are “loss leaders” for attracting customers. In many cases companies won’t honor those quotes until confirmed in person with an agent. Buyer beware.

Why do insurance companies and agents seem bent on selling you the most insurance coverage possible? Yes, they want customers to be financially secure with full coverage. But it also increases their commissions and profits. For myself, I’ve never understood the obsession with buying enough coverage to rebuild my house, especially if the cost per square foot would be more than market rates. If my house burned to the ground, the last thing I’d do with the next year or two of my life would be recreating it on the current lot. Instead, I’d go shopping for a similar, already-built house nearby and get on with my life.

Anyway, after all my insurance research, I decided to raise my deductible at USAA from $1,000 to $2,000 because the payback on the premium savings seemed compelling. In the end, I saved about $200 annually on insurance for my efforts.

Travel

Travel, a purely discretionary expense, is also one of the largest for many retirees. For most of us, travel is a primary pleasure of retirement. But it doesn’t have to be shockingly expensive.

Some observers are amazed to learn that our retirement budget includes no international travel, and very little long-distance domestic travel. We’ve made exceptions as required: Caroline did a budget trip to China offered by our local Chamber of Commerce, and we both travel cross-country to visit and care for our mothers as needed. Other than that, we’ve stayed true to our preference for regional road trips, camping in our small RV as much as possible.

Flying, such a staple of the modern world, may not be financially or ecologically sustainable. For the sake of our budget and the environment, we try to limit flying as much as possible. When you do fly, check out the articles Chris has done on travel rewards.

Anything you can do to increase the number of nights you stay in one place, while reducing the miles travelled to get there, has the potential to reduce your overall travel expenses. Don’t forget to ask for a discount if you’re staying a week or longer. And if you’re attracted to long, exotic vacations on a budget, consider house swapping or house sitting.

So that’s a quick tour through my budget-trimming exercise with some inspiration to get you started. But it’s far from the last word on the subject, as reams of reader comments and frugality blogs attest. If you have any favorite or relevant budgeting ideas for these expensive times, please add them below!

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OUTDOOR ADVENTURE: My new web site explores the books, authors, and trails of the long-distance hiking movement and has more about my forthcoming memoir Rain and Fire In The Sky: Beyond Doubt On The Colorado Trail. Click over to TrailMemoir.com.

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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