Do You Have to Cut All Your Expenses to the Bone?

We have some amazing mentors in the Millionaire Money Mentors forums. Some of them are even accomplished authors!

Over the next few months I’ll be sharing excerpts from some of these authors’ works.

Today we have an excerpt from F.I.R.E. for Dummies — a book that I loved reading and is now my go-to for introducing people to F.I.R.E. 

It’s written by one of the mentors in the forums and makes for a great Christmas present (if you need any ideas).

The section today details what I consider to be a good perspective on budgeting, saving, and spending — save all you can/want to given your goals by only spending on what’s important to you, and cutting the rest.

With that said, let’s get to today’s excerpt…

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Do You Have to Cut All Your Expenses to the Bone?

I don’t like budgeting. There, I said it. You may not be a big fan of it either. That “b” word often conjures up negative thoughts, especially if you know you need to make some changes. Although reducing your expenses is one of the key components in reaching F.I.R.E., there are many ways to achieve this besides buying into the myth that you have to cut everything to the bone. That sounds miserable, and misery is not what you’re going for if you want to stick with anything for the long haul. 

You do need to know where your money is going and live on less than you earn. But even the most well-intentioned F.I.R.E. plans won’t survive if you attempt to annihilate every expense without regard to the value and happiness certain things bring you. 

Here are a few things to remember about your expenses: 

• Resist the urge to increase your lifestyle as your income rises (avoid lifestyle creep), and you should be fine.
• Make sure that your expenses don’t escalate faster than your income. 
• The bigger the gap between your expenses and your income, the sooner you will reach F.I.R.E. 

If you are overwhelmed with debt or feel your spending is out of control, getting your expenses in check is an important early step in your journey. 

This chapter helps you focus on spending your money on the things you value, reducing the big expenses that have the most impact, and finding smarter ways to lower or cut your expenses. 

Prioritizing What You Value

I’ve heard some smart people say that if you want to see what’s important to someone, just look at their bank account or credit card statement. Those transactions tell a story of where your money is going. 

If there are lots of flights, hotels, and ride-sharing charges on your statement, that probably means travel is a big part of your life. 

Although reducing your overall expenses is a key part of building wealth, you can do it in a strategic way. Not all spending is created equal because there are some things that you value more than others. Value-based spending means aligning what’s important to you with how you spend your money. 

There are only two ways to fix a budget: 

• Increase income 
• Reduce expenses 

Of these approaches, focus on the one that you’re better at. If you choose to reduce expenses, just remember that you can only reduce expense so much. You have a lot more room to increase your income (see Chapter 10). 

When you reflect on your spending, examine each area where you put your money and think about whether it represents what really matters to you. 

Cutting out expenses that bring you joy is a quick way to burn yourself out and can be a deterrent to your pursuit of F.I.R.E.

Don’t neglect the other side of the coin, which is not spending on things you don’t value. Here’s a few examples of what I mean: 

• You may have no interest in watching TV, so you save on streaming services. 
• You may have no desire to drive a new car, so you can save a ton by buying an older vehicle and possibly paying cash for it. 
• You may be flexible with where you want to live, so you can choose a location where housing and other expenses are less expensive. 

As you review your expenses, try assigning each of them a high or low value. This will make it more obvious where you can make adjustments without feeling deprived. 

Considering the cost of making memories

I recall that in the early days of the F.I.R.E. movement there was more focus placed on radical expense cutting, but I’ve felt a shift over time toward enjoying the experience while on the journey. You should feel inspired to create memories, not stress when it comes to managing your expenses. Being intentional about spending money on certain things can bring you more happiness than just cutting everything out. 

For instance, installing a fence so that your kids can play with the dogs in the back yard where you can easily keep an eye on them may make you feel safer and more at ease. 

You may have heard of the extreme frugality and minimalism that sometimes gets attributed to the F.I.R.E. lifestyle. Though there are some people who subscribe to this (and are probably pretty good at it), a life of deprivation is not what F.I.R.E. is about. Even on the path to F.I.R.E., you still want to live life and be able to savor the moments along the way. Doing so doesn’t have to break the budget, but even if you do go a little over budget from time to time, what price tag do you put on making memories like these: 

• Celebrating birthdays or graduations with friends and family 
• Taking time to do activities with your kids while they’re young 
• Vacationing with the special people in your life 

None of these are free, but they’re also things you don’t want to skip out on. Whatever price tag you put on them, it’s simply a matter of adding the appropriate amount to your planned spending.

I made a deal with my daughter when she got her first job at 15. I agreed to match whatever she saved toward getting her first car. I wasn’t anticipating her saving much at that age, so she surprised me when she had saved nearly $4,000 over the course of a year. I was glad to do the match as promised but the real win was that my lessons on saving actually stuck. 

Measuring with your own stick

I’ve mentioned throughout this book the importance of using your own measuring stick so that you don’t compare your standards with those of others. Spending your money in the way that’s best for you is one example of this. Here are some example scenarios: 

• Someone brags about how much they saved by having a roommate who covers half their mortgage. This is a great house hacking move that cuts housing expenses for someone who doesn’t mind having a roommate. However, this may be an unrealistic prospect for you and your lifestyle. 
• Some of your friends are paying for lawn mowing service and may think it’s odd that you don’t. But if you love maintaining your own grass and take pride in getting perfect lines when mowing your own lawn, you may never want the expense of hiring someone else to do it. 

Your own values and priorities are what matter. What works for you may not work for another person, and vice versa. There are many ways to reduce expenses and the rest of this chapter will give you some ideas. 

Evaluating the Big Expenses

An honest evaluation of your largest expenses will go a long way in determining where adjustments may be needed. These also tend to be ongoing basic expenses that take a huge bite out of your budget. I don’t think you need to completely cut out any of these expenses. Often a little creativity goes a long way in coming up with a happy medium. 

Think about the areas where you’re willing to be flexible without adding unnecessary stress or anxiety to your life. 

Housing, transportation, and food are almost always at the top of the list. You should also include taxes, which sometimes are overlooked as an expense you can control (read more in Chapter 15). Also, if you have kids, child care gets to be a huge drag on your budget, too.

Housing 

Housing costs can eat up your budget in short order. Your housing expenses generally should represent about 28 percent of your gross income. This is a benchmark that includes principal, interest, taxes, and insurance (PITI). When you’re getting approved for a home loan, this amount will vary by lender (most will gladly approve you for a lot more). 

Many people rationalize the high expense of owning a home as an investment, which brings up the never-ending debate of renting versus buying. You will have your own set of reasons why you want to do one or the other, but be sure to do a realistic comparison that takes into account things other than the rent payment versus the mortgage payment. 

After owning a house for the past 20-plus years, I have come to realize that home ownership goes far beyond the mortgage payment. Here’s a list of costs associated with most homes: 

• PITI (principal, interest, taxes, and insurance) » PMI (private mortgage insurance) 
• HOA (homeowners’ association) fees 
• Trash/recycling fees 
• Lawn and landscaping care 
• Indoor/outdoor maintenance and repair 

If you want to run your numbers to compare renting and buying, check out the Home Rent vs. Buy Calculator at www.dinkytown.net/java/home-rent-vs-buycalculator.html.

The tax deduction for the property tax and mortgage interest is not used as much anymore because the standard deduction is much higher than it used to be. For example, for 2024, the standard deduction for married filing jointly is $29,200. 

I’m not attempting to convince you to rent instead of buy. I’ve been a long-time homeowner and do not regret it one bit. But for my next move, I’m leaning toward renting for a while because I want more flexibility and less maintenance at this stage of my life. 

A few of the other factors in how big of a chunk your housing costs will be include

• Cost of living for the location: San Francisco, California, will be much higher than Nashville, Tennessee. 
• Mortgage interest: Rates were about 3 percent in 2020 but have risen to about 8 percent in 2024. 
• How much of a down payment you put on the home: A lower down payment means a higher monthly mortgage and possibly mortgage insurance. 
• A fixer upper versus move in ready: A home that needs a lot of work is going to come with more additional expenses than a home that is fine just as you purchase it. 

Remember that your decision doesn’t just stop at the math. Things like being near family or near better public school districts could be important factors that impact your quality of life. 

Transportation 

Transportation can be a big expense, although it was probably a bigger expense before the COVID-19 pandemic in 2020. Long commutes were a big factor when everyone went into the office, but if you now work from home, you may have more flexibility to reduce your transportation costs. 

Depending on where you live, these costs could include

• Public transportation such as bus, train, or subway 
• Ridesharing services like Uber or Lyft 
• Parking 
• Maintenance, insurance, and gas for a personal vehicle 

Check with your employer to see if you have access to a Commuter flexible spending account. These accounts allow you to set aside pre-tax dollars to cover commuting costs such as public transportation and parking, which are typically available for those that live in big cities like New York or Chicago. 

The biggest transportation expense is usually for personal vehicles. Buying a new car every few years is probably the biggest drain, plus there are costs of interest on loans if you finance the vehicle. The value is also likely to go down more quickly because cars experience their fastest depreciation in the first few years of ownership.

My non-F.I.R.E. confession: 

I learned about vehicle depreciation the hard way when I purchased a new 1989 blue Ford Probe while I was in college (I know, horrible decision). I was barely able to make the monthly payments. Less than a year after getting the car, I tried to refinance it and got the awful news from the bank that I owed more on the car than it was worth. That was the first and last new car I ever bought. It was a hard lesson, but at least I learned it early. 

I’ve since learned much smarter ways to buy a vehicle. There are many approaches to lowering your car expenses while still driving a nice reliable vehicle. Here are a few things to remember: 

• » Buying a used car is almost always cheaper than buying a new car, and it won’t depreciate as quickly. 
• » Doing a little research goes a long way to making sure you get the best deal (online shopping for cars makes it very easy). 
• » Shopping around for the best loan rate if you are financing the car can help you get lower monthly payments.
•  » Buying a car is almost always more cost effective than leasing. (The one small exception is if the vehicle is for business purposes.) 

My non-F.I.R.E. confession: 

I drive luxury cars that use premium gas. I still find ways to keep my costs in check by buying used and paying cash. I also put only about 7,000 miles per year on the car. I’m well aware that I could further reduce this expense if I got a cheaper car and invested the difference in VTSAX (the ticker symbol for the Vanguard Total Stock Market Index Fund). I intentionally included this in my budget, and I still reached F.I.R.E. This probably isn’t a popular choice, but I defer to the philosophy of using my own measuring stick. 

Food 

All people have to eat, but food costs vary wildly from person to person. That said, this is probably one of the most flexible and easily controllable of the big expenses. An immediate adjustment can include some low-hanging fruit like 

• Reducing how often you go out to eat 
• Shopping at a low-cost grocery store, such as Aldi (a F.I.R.E. community favorite) 
• Buying in bulk at a wholesale club like Costco or Sam’s Club 
• Using grocery rewards perks or coupons 
• Using a credit card with hefty rewards at grocery stores 
• Cooking at home more or meal prepping (making multiple meals at once to eat later) 

Don’t underestimate the financial impact of making a few food-cost adjustments you may not even notice (except that you have a little more money in your bank account). 

You may overlook some options that aren’t cuts so much as they are a way to do things smarter, such as these ideas: 

• Alcohol: Beer, wine, and cocktails are much more expensive at restaurants than at home. You may also find that the products at a grocery store may be priced differently than those at a wine and spirits store. 
• Meal service subscriptions: These services can get costly after the initial promo period. Having a subscription means that you are automatically charged even if you don’t really need a box in a particular week. Take a second look and make sure you are still getting value out of it. If you continue with the service, make sure to skip the deliveries you don’t need so you’re not charged unnecessarily. 
• Food delivery: Oh, my, these have gotten out of hand! Just about everyone has used DoorDash or Grubhub for restaurant food delivery, and it used to be very cheap to do. Now many places charge more for menu items and a delivery fee. And don’t forget about the tip for the delivery driver! It’s a similar story for ordering groceries online. There are times when convenience trumps cost, but shifting a habit may make a difference. 
• Food waste: I hate throwing away food, and I’m sure you do, too. Buying fresh foods often means things go bad before you can use them. You may save more money by buying smaller quantities and shopping more often. This is especially true if you will be leaving home for an extended period of time.

Taxes 

Taxes are often overlooked, and you may even think it’s not something you have control over. Consequently, I made sure to include a section for taxes in this section as a “big” expense. 

The higher your income, the more taxes you may be subject to paying. However, there are ways to reduce your taxes, some of which you can do while doing other wealth-building activities on your path to F.I.R.E. Here’s just a few:

• Pre-tax deductions for contributions to employer-sponsored retirement plans such as a 401(k), 403(b), or Thrift Savings Plan (TSP) 
• Pre-tax deductions such as traditional IRA and Health Savings Account (HSA) contributions and the student loan interest deduction 
• Tax credits such as the child tax credit and lifetime learning tax credit 
• Favorable capital gains rates on growth on regular brokerage accounts 
• Deductions for business expenses for self-employed people or small business owners 

A little tax planning can help ensure that you are minimizing your tax liability. Whether you do your own tax return or hire a professional, you are ultimately in control. 

One big pro where taxes are concerned if you own your own home is the favorable capital gains tax treatment when you sell the home. If there is a gain (over what you originally paid for it) when you sell your primary home, it’s tax free up to 

• The first $250,000 of gain for a single person 
• The first $500,000 of gain for a married couple filing jointly 

This is referred to as a capital gain exclusion and generally requires home ownership and residence for at least 24 months within the previous 5 years. 

The topic of taxes is wide ranging, and you can find multiple references throughout the book. You can find the basics in Chapter 5 and more details about controlling your taxes in Chapter 15. You may also want to check out Reducing Your Taxes For Dummies by Eric Tyson (Wiley). 

Child care 

If you have options like family members or a stay-at-home partner, child care costs may not be much of a concern. But if you have young children and you don’t have those options available to you, child care can take a big chunk of your income. I know it’s hard to think about cutting costs when it comes to your little ones, but there are a couple of options to help with the cost of child care. Both are related to taxes: 

• Dependent Care FSA: This type of flexible spending account allows you to use pre-tax dollars to pay for child care expenses. 
• Childcare Tax Credit: This tax credit helps you pay for the care of your child or children.

Being Smart Rather Than Just Cutting

Creativity comes in handy when managing your expenses. If there are areas that you don’t want to cut, you can always compromise with some type of adjustment or happy medium. 

All expenses aren’t created equal, so being smart and strategic gives you better results than attempting to cut everything across the board. The goal is to be realistic with the changes you make so that you find your budget easier to stick with. 

Finding a budgeting method that suits you

Basic budgeting has gotten a little easier than it used to be because you can use apps. Back in the day, people just used a yellow pad and drew a line down the middle to create two columns. Though the methods for tracking a budget are different, the goal is the same: planning how you spend your money. 

The key is to find a type of budgeting method and tool that suits you. You may naturally keep your costs down and always look for the best deal; if you do, you’re at an advantage. Even if you do that, you still have to get a sense of how much you spend each month because you need that number to calculate your F.I.R.E. number (25 times your expenses). 

I do my budgeting a little backward: save and invest first and then live on what’s left. I’ve always been a better saver than a budgeter, so I worked from the area where I was stronger. 

You can try my backward budgeting method or start with one of these common methods: 

• Zero-based budgeting: Every dollar of income is assigned a place to go. 
• 50-30-20 budgeting: Separating your income into three categories: 
  • 50 percent needs 
  • 30 percent wants 
  • 20 percent savings 

If you are new to budgeting and tracking your spending, remember that specific categories are better than broad categories. For example, instead of having a single category for food, break it out in more detail:

• Groceries 
• Alcohol 
• Restaurants 

Specific categories allow you to more easily evaluate areas that you may want to change or adjust. 

The tool you use to budget is probably more important than the method. Having an automated system like an app or software may be the easiest of all. One example is the You Need a Budget (YNAB) app, but there are many others. Most have a free version that you can use, and some have a small monthly fee for access to more features. 

F.I.R.E. people love spreadsheets, so many do their budgets with one. If you use this method, you have the flexibility to customize your expense categories and other data points you want to see that may not be available in a prebuilt tool. If you have reservations about connecting your financial accounts with a budgeting app or software, using a spreadsheet may be a better option for you. 

After you establish your budget and get a clear picture of how much you need to live on each month, remember that your life and finances don’t stay the same forever. When changes happen, make adjustments as needed.