Finding money to finance your goals can be challenging. Generally, to finance your goals you either need to increase your earnings and/or decrease your spending. To maximize your money, you should do both. However, life can be overwhelming and often times you may not know where to start. I suggest you carve out some time this weekend and create a plan to reduce your expenses and increase your savings with the Expense Avalanche or Snowball!
What’s an Expense Snowball?
You’ve likely heard of Dave Ramsey’s Debt Snowball, where you create a debt pay-off plan targeting your smallest debts first. You throw all of your money at the smallest debt, meet the minimum payment on your other debts until small debt #1 is paid off. Then, you take the money you were putting toward small debt #1 and add it to the minimum payment for small debt #2 until that debt is paid off. You continue with this snowball method until all of your debts are paid. Although this isn’t the most efficient method, psychologically it may be easier for some to tackle and the snowball provides momentum.
Likewise, the Expense Snowball would require you review your smallest monthly expenses to see if you can reduce or eliminate them and redirect that money toward financing your goals.
What’s an Expense Avalanche?
An alternate debt payment method is the Avalanche Method, where you pay off the debt with the highest interest rate first (vs. smallest balance). Similarly, the Expense Avalanche would allow you to tackle your highest expense items to see if you can reduce (or eliminate) them and redirect your savings to finance your goals. This method can make a big difference in a short period of time.
How to Get Started with your Expense Avalanche or Snowball
Step 1: Download or export your last one to two monthly checking account bank statements (print them or view them electronically – whatever your preference).
Step 2: Group and tally your expenses (i.e. gas purchases, dining out, cash withdrawals, groceries, car payment, Starbucks, cable, cell phone, etc.). Your expenses should now be grouped and you should have a total amount spent for each group (or category). I’m an excel nerd, so that’s the easiest tool for me to use.
Step 3: List your tallied expenses (total amount for that group or category) in descending order (highest expense listed first, followed by your next biggest expense, down to the smallest expense).
Step 4: Take a deep breath and don’t panic. You might be shocked at how much money you spend in certain areas.
Step 5: Identify your top 3 expenses if using the Expense Avalanche Method or bottom 3 if using the Expense Snowball method.
Step 6: Make a determination which expenses you can reduce (or perhaps eliminate) and start brainstorming ideas of how.
Step 7: Take the steps to reduce or eliminate those expenses for one month and move the money you saved to your savings account (or some sort of separate account).
Step 8: The following month, do the same with the next expense (or tackle multiple expenses at once). Overtime you’ll have reduced your expenses and increased your savings substantially!
Understanding your expenses, and consciously spending and saving can be a game changer for your finances. This knowledge also helps you align your spending/saving with your goals. Before you realize it, you’ll have reduced your expenses (likely significantly) AND have larger savings to finance your goals.
Examples of Common Expenses and Ideas to Reduce or Eliminate Them
- Car payment: Trade-in your car for a less expensive model, sell your car and ride share, share a vehicle with your spouse or partner, or use public transportation
- Dining out: Reduce your meals outside of your home, cook your own meals, pack your breakfast and/or lunch
- Groceries: Find a cheaper grocery store, build your grocery list around the weekly specials, buy in bulk, focus on less expensive items, buy produce that’s in season
- Gas: Carpool, ride your bike, ride share, take the bus (even if just occasionally)
- Cash withdrawals (or debit card purchases you can’t account for): Give yourself a weekly allowance less than what you’re currently spending; don’t use your debit card – use your weekly allowance and stop spending when that money runs out.
- Mortgage: Refinance
- Insurance: Shop around, bundle your policies (companies often give discounts if they hold more than one of your policies)
- Gym membership: Quit the gym! (reminds me of the Friends episode), exercise at home or outdoors (walk, run, lift weights or cans of food), find a cheaper gym or maybe a new gym offering specials.
These are just a few ideas, but there are many more types of expenses and ways to reduce them that can fit your lifestyle. In addition to controlling your spending and increasing your savings, you’re developing good spending habits and practicing discipline. Financial discipline is a key component to your financial wellness and is practiced by most who achieve wealth and financial independence.
You’d be surprised at how much you can save if you are conscious about your spending and have other financial goals. If you’re stopping by, let me know what types of expenses you’d like to eliminate or have eliminated and how. I wish you luck as you finance your goals!
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