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A young couple wants to create space in their budget to start investing for retirement, have a child, buy a house, or a number of other common goals. They analyzed the cost of dining out less, buying new clothes more sparingly, and not picking up ancillary items at Target. None of these sacrifices made the kind of room they wanted in their budget.
While it is easier to cut our wants, the items that we clearly do not need to survive, reducing wants by substantial margins often still has only a small impact on an overall budget. While we consider “wants” the only variables we can manipulate, it can be worth getting more creative.
This requires changing the cost of your needs.
In Do You Really Need That? Analyzing Wants vs. Needs, I explored how you can break down a budget item, like your housing cost, into a baseline “need” that would cover your basic requirements and a “want” portion that pays for additional luxuries. After analyzing your own needs, the actual expenses you need to survive, you probably noticed these costs seemed more inflexible and non-negotiable. You can decide not to go to the movies (a want), but not having a home seems imprudent.
Needs have two competing qualities from a budgeting standpoint:
Our largest expenses are needs, meaning decreasing them has a bigger impact on our financial goals.
They are more difficult to cut because we perceive them as fixed.
Decreasing our largest needs costs could open up large enough percentages of our budgets to have life-changing consequences. They are needs, though, and we cannot compromise on our needs.
But what if we could?
Who Should Decrease Needs Costs?
Anyone experiencing reasonable financial stress should consider decreasing the cost of their needs expenses. Financial stress can exist due to many causes, but some common ones include:
Debt
Job, salary, and benefit changes
Life changes like moving to a new location
Family changes like having a child, taking care of of an elderly relative, divorce, or marriage
New large expenses like paying for college or a new car payment
A lack of salary progression over time
If you are experiencing significant financial stress, altering your needs costs creatively may provide the path to reduce that stress. While folks often work to limit takeout or Amazon purchases to cut costs, decreasing one of your largest expenses can make a huge difference.
Needs Mean Bigger Changes
If housing is not your largest expense, you are in the overwhelming minority. Whether 15% or 40% of your income goes to your housing expense, it holds a significant part of your budget.
Let’s say you spend a lot on takeout, and it accounts for 5% of your budget. If you completely stopped eating takeout, you would probably be extremely sad and only have 5% of your money to save or invest.
If you are at the low end of that housing cost range and decreased your housing budget by 50%, you would have an extra 7.5% to save or invest. That is more than eliminating all takeout. Additionally, if your housing cost is larger, as it is for most Americans, cutting that cost in half would have an even greater impact.
Housing and transportation are the largest expenses for most Americans. As a city dweller myself, I recognize that sometimes housing is much more expensive while transportation is relatively inexpensive, but if you consider the two together, you probably have some room for creative cost reduction of these needs.
Making small adjustments in these two categories can yield more generous returns than entirely cutting out a “wants” category that gives you joy. So, if you want to retain some joy in your life but really move the needle on your debt payoff, saving, or investing, change your needs costs.
Reduce Your Housing Expenses
Not every creative solution will work for you. Your current stage of life, priorities, family size, work situation, location, and more may affect the plausibility of a certain needs expense reduction solution. These ideas also involve varying levels of creativity, and some may require an investment in time that you simply do not have.
Why run through them at all? I have had dozens of conversations where it became clear that the other individual had never contemplated a creative housing situation to decrease their financial stress level. As someone who hates financial stress more than the idea of any of these solutions, I think it is important to know they exist if you seek a more creative path to your finances.
To start with the not-so-crazy: If you analyzed your housing cost and found that a large portion of it paid for “wants” (like my wonderful swimming pool!), you can find a new place that only covers your needs. You can also move to a less expensive neighborhood or just prioritize one want at the expense of others. Even if you own your current home, renting it out and renting a different one to live in is possible.
Getting a little more creative, you can rent out a room in your home. If you have a finished basement or over-garage apartment, you can even offer a place with some privacy and really turn your home into a money-making business!
If long-term rentals do not work because you are short on space, there are still rental possibilities to capitalize on your space. If you use a room for an office Monday-Friday but do not work on weekends, place the room on AirBnB or Vrbo for weekends only, assuming your city and HOA permits it. If your local laws or HOA rules are not renter-friendly, you can still participate in a home exchange where you identify a traveler who lives in a location you would like to travel and switch households, so you do not pay for both housing and accommodation costs: You just pay for your normal housing! If you live in a high-cost-of-living area, you may even still profit on a home exchange.
When you do not have enough space to make any of the preceding options available, living with roommates may be the right choice for you. The more roommates you fit into a space, the more folks you have to divide the cost. There can even be options to turn an office/den into a bedroom to maximize space and cost-sharing.
If you have the money to acquire your own space but want to entirely knock out your housing expense, or even make money on your housing situation, house-hacking may be for you. There are numerous variations of house-hacking, but it involves saving up a down payment and purchasing your own place. This could be a regular home or condo with multiple bedrooms or a larger multi-family home. In the condo or home, you would rent out the bedrooms within it to cover your mortgage payment. In the multi-family property, you do the same thing, but you may even be able to make money and/or have your own space. If house-hacking interests you, read Scott Trench’s Set for Life, or listen to the audiobook. (Disclaimer: I have not listened to the five-year anniversary audiobook, but the book is fantastic, and I think it is great that an audiobook now exists for those that prefer the format!) Scott Trench is the best source for house-hacking because he actually lived what he teaches: He bought a multi-family property and started by living in a single room in the basement apartment, gradually and literally moving up in his property and eventually into another home.
If accumulating a downpayment seems impossible but a specific location is unimportant to you, go in the complete opposite direction: Geoarbitrage is another path to reducing your housing expenses. In Quit Like a Millionaire, Kristy and Bryce discovered that they actually saved money by traveling for an entire year by choosing some areas with lower costs of living. If you have a flexible situation, you may actually be able to jumpstart your debt payoff, savings, or investment by living near the beach in Thailand for a year.
Transportation
Transportation is the other major need with numerous options that go unconsidered because most assume, “I need a car.” Patrick and I did not have a car for nearly six years, and the car we purchased at the end of 2020 is still entirely a want based on our lifestyle and location. That said, cars certainly become more essential the farther you live from a major public transit system.
Even if you need a car, assuming a certain vehicle is not required for your business, you can opt to purchase vehicles with good gas mileage so your recurring gas costs are low. Opting for a used car is also generally cheaper, although the used car market is a little crazy right now! (The car we purchased in December 2020 could be sold at a 50% profit right now, a truly unusual phenomenon due to delays in new car production.)
If you must have a car, especially if you must own a vehicle that costs more than a basic sedan, there are other opportunities to earn money. Turo allows individuals to rent out their vehicles for money when they are not using their cars. Similar to the home exchange concept, you can also participate in car sharing, allowing you to park your car for free at a place like the airport in exchange for allowing a company to rent out your car while you are not using it. You even make a small amount of money if your car is rented! Monetizing your car by picking up one of the many side hustles that rely on car access, from Uber to DoorDash, is another possibility, assuming you have the time.
Alternatively, you can embrace the no-car life! Or downsize from a two-car family to a one-car family. As a former member of the no-car club, not having gas, parking, insurance, and maintenance expenses is a delight. If you live in any metropolitan area, the buses and public transit system are great options. To take it one step farther, get a bike or walk/run everywhere. In my pre-car days, I cut my transportation cost to $100/month by taking the DC metro most places I needed to go and running to or from work a certain number of trips to decrease the metro cost. Biking, running, or walking has the added benefit of improving your health along the way.
If you are hesitant to make the jump to car-free life, remember many backups exist. If you are in a metropolitan area, you may have access to shared bicycles or scooters. You can also use ZipCar or Turo in the event that you need a car for an excursion or can order an Uber, Lyft, or cab for a one-way trip.
Reduce the Big Needs
Housing and transportation are the big-ticket items in most budgets. If you want to free up some space in your budget, start there because it is where you have the most potential. Even the seemingly non-negotiables often have considerable wiggle room. The key is to think creatively, and soon you will be on your way to achieving your next financial goal!
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