Years ago a concept called the “latte factor” became quite popular. The idea was that, if you just stopped buying lattes, and invested all the money instead, you would become a millionaire. So that latte you’re drinking is a “million dollar latte.” It was a great concept; I loved it. However, the reality is this: your monthly fixed expenses (housing, bills and transportation) are so large compared to the rest of your budget that if those are out of control, all the forgone lattes in the world won’t matter.

If you want a smarter budget, you’ve got to start with the big expenses. Those who work with retirees are very used to this concept. If someone needs to cut spending in retirement, the first place most people look is to downsize the house, or live somewhere cheaper (and warmer, usually.) Again, you can eliminate all the lattes in the world, but if your rent is too high, things aren’t going to work out.

rent is too high
If you’re paying too much in rent, saving on lattes isn’t going to help much.

People often bristle at the idea of cutting down on the house, the rent, or the car. Here are a few things to remember. First, the time to negotiate is always when you buy. When we tell ourselves that we’ll negotiate on a large asset when we sell, we’re just not being honest. That car purchase, or the decision to sign the lease, is something that has big consequences. And we should treat those purchases as such. Be willing to haggle!

And if you know you aren’t good at negotiating, that’s fine. Know that in advance, be prepared, and look for ways to get good deals without having to negotiate yourself. Here are a couple of examples. Most people know that new cars are not a good financial deal. They depreciate immediately. But many people are also quite wary of used car dealerships. You can buy used cars, that have certainly been maintained properly, directly from rental companies. The price is not negotiated. When it comes to buying a house, take the time to find agents or brokers that will act in your best interest. Spend the time to learn what conflicts of interest exist in the real estate market and how to deal with them.

Sometimes we end up doing about the same amount of comparison, negotiation and research on big purchases that we do on smaller ones. This is a mistake! A 5% discount on a car is a heck of a lot more important than a 5% discount on toothpaste. Patience is often a wonderful thing. If the deal you want isn’t available right now, maybe it will open up later.

Especially when you are in your early career, it really pays to spend a bit of time taking the “cheap” way out. The stress of living just at your means is really tough when you aren’t used to it. If you are spending more than 30% of your income on rent, life is going to be stressful. If you are spending more than 15% of your income on transportation, things are going to get really rough.

Here is another useful way to think about all this. If your spending on food, transportation, housing and bills is more than two-thirds of your take home pay, that’s probably too much. So look at all your expenses that get paid every month, add in what you spend on food, and start looking at where you can change things.

The most important place to change your budget is those monthly expenses.

But once you have done what you can there, it’s time to look at the rest of your budget. Some changes are simple. Anything that doesn’t line up with your values, ditch it. This has the enormous benefit of giving you small victories plus allowing you to achieve goals other than just controlling spending. Anything that doesn’t improve your health can be next. No reason to only solve one problem at a time.

When you know you shouldn't be spending so much money on booze, but you haven't got anything to replace it with
Maybe I don’t need to spend quite so much on beer…

After that it gets complicated. Most “tips and tricks” for reducing spending don’t. Here is a great example. Stores wouldn’t offer coupons, membership cards or sales if such things caused them to lose profits. Coupons and sales mostly just encourage people to shop more in total, thus spending more in total. The same goes for rewards on credit cards and all sorts of other things that are supposed to save you money. Always try to figure out what the company’s best interest is when you look at deals. Because if you can understand that, then sometimes you really can save a lot of money with coupons and deals.

Finally, it’s worth mentioning that for things you want to last for a long time, sometimes you really should spend money. Buying the cheapest electric razor on the market rarely works out well. And the same often goes for winter coats–although you may find that second-hand stores have excellent clothes for incredibly low prices. But in some cases, yes, you should spend some money.

And this leads us back to where we started. For most of us, a smarter budget means lower monthly expenses. It’s hard to find any magic that avoids that reality. Because let’s be clear–the goal is to get to the point where you are not only spending less than you make, but spending so much less that it’s easy for you to keep 6 months worth of living expenses in savings.

That’s the minimum goal. Many of you would be happiest having a whole year’s worth of living expenses saved. That’s the point at which money stress ends. Which brings us to the next question: why would we want to lower monthly expenses?

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