Personal Finance Step 2: Cut Expenses

Welcome back comrades! I think I said that Step One in this Personal Finance 101 series, Tracking Your Expenses, was the most painful. I might have lied. Seeing how much money you spend on Amazon purchases you don’t remember is painful to be sure, but the real work comes in trying to stop that pattern. And that is Step 2!

Step 2: Widen the Gap between Income and Expenses - Cut Expenses

It is pretty obvious that to build your net worth, you need to save money right? Maybe that isn’t obvious so let’s get one thing clear: income is NOT wealth. It doesn’t matter if you are earning 200k a year if you are spending 210k a year. You are building less wealth than the person who is earning 78k a year and saving half of that (hi). We are interested in financial security remember? That is building wealth so that you can handle the bumps in the road without taking on debt and, eventually, have the freedom to stop working or work a job that pays less but is more rewarding! That is what wealth is about, security and freedom. A high income may fund livestyles of the rich and famous, but it will ONLY build wealth if you are mastering Step 2. Widening the gap between that income and what you spend. AKA saving money. You have heard about the girl who has champagne tastes on a beer budget? Let’s have water tastes on a champagne budget and all retire in 10 years.

In Step 1 we tracked our expenses and calculated our net worth. Our work in Step 2 is to figure our what our monthly income is and see how that income lines up with our expenses. In other words, we need to figure out our cash flow. If we are earning more than we are spending, horay! We are cash flow positive. If we are spending more than we are earning, we are cash flow negative and are digging ourselves down in the muddy mires of debt.

Calculate Income: If you are an employee with a job you show up to and receive a paycheck weekly, biweekly, or monthly, this is an easy task. Now, importantly, we are going to be dealing with TAKE HOME income. That means your income after your taxes and social security is taken out. So look at your actual pay stub and see what you are taking home with each paycheck, then figure out from there what your monthly take home income is. I get paid monthly so this is easy for me. If you are an entrepreneur or freelancer, this is going to be more difficult for you to figure out but you need to be keeping good books for tax purposes anyways so hopefully you have a good starting point. Don’t forget to include any side-hustle income you have. I earn an extra $40/week walking dogs so I add that to my monthly total. For purposes of this explanation we are going to use the average salary (approximately) of a US 30 year old which is $56,000/year according to Google. This is a good example because I am able to closely approximate what this person’s take home monthly income would be because I earned $52k for the first three years of my career. I took home about 3k per month after taxes when I was earning that much so we will say that our average Sue takes home $3,300 per month.

I will use my expenses in this example (estimated since I have to cut out the Brent related expenses since I am going to assume that Sue is single and ready to mingle).

You did a great job tracking your expenses in Step 1, and you can see them in Personal Capital. You can either work off that view or put your expenses into an excel spreadsheet. I recommend the excel spreadsheet so you can do some fancy equation things.

Here is how my, I mean Sue’s, expenses break down.


Sue is saving 1,287 of the 3,300 that she brings home each month. That is a savings rate of 39% - nice work Sue!! When I was bringing home about 3k per month, I was at about a 40%- 50% savings rate each month so don’t think that this is some super lean budget. I certainly wasn’t living a Kardashian level life, but I definitely had plenty of fun and everything I needed. I think a good savings rate to shoot for is 50%. Obviously this isn’t a possibility for everyone, but if you aren’t supporting a family and are bringing home anywhere around 3k per month- it is totally doable! Here is some inspiration. If 50% sounds crazy start with 20% and work your way up. In Step 6 we will talk about increasing your income, which, obviously, can make it easier to save more money. As long as you avoid lifestyle inflation as you income increases!

Now let’s say Sue actually makes 2k per month instead of 3,300. At her current spending rate she is going into debt every single month. No Sue! There is a lot of fat in this budget to trim. If Sue needed to cut expenses, there is ample opportunity for her to do so. Things that Sue should cut to avoid debt:


By saving an additional 423/month, Sue is not longer going into debt and can save $400 per month! Other ways Sue could have a drastic impact on her budget is by finding a less expensive place to live. The most powerful way to have an impact on your spending is by reducing or eliminating reoccurring expenses.

This lunch/dinner of random veggies in my fridge and hummus cost about $1.75

This lunch/dinner of random veggies in my fridge and hummus cost about $1.75

When looking at your expenses and deciding what to reduce or eliminate it is important to decide whether what you spend your money on is a reflect of what you truly value. It is a judgement call that only you can make. But, you are not entitled to a certain lifestyle. I think a lot of us expect to live like our parents live now when we are just starting out. That is not a good mindset. One time I was chatting with a friend who was job hunting. She was telling me that she kept feeling insulted by what companies were offering to pay her and that she can’t live on that salary. I asked her what she meant by that, you know since millions of people actually live on minimum wage, and less, every day. She said that she would have to change her lifestyle to live on what companies were offering her. Not to hate on this friend, but that is reality. You absolutely have to live on your means and are not entitled to live a certain way. It’s also good to remember that a lot of people who seem like they are living these great lives are going into debt to do so. Debt takes away your security and your freedom. Don’t believe that living in debt is normal and okay, the consumerist lifestyle is a life of stress and fear.

Some important things to consider when looking at Sue’s expenses. We didn’t include any debt payments in Sues budgets. You can easily imagine a $400 student loan payment, a $200 car payment, and a $300 credit card payment on top of her normal expenses and all of the sudden things are a lot more difficult to manage. The power of eliminating recurring expenses like loan payments cannot be overstated! Step 4 in this series is eliminating consumer debt and it is incredibly important! If you have debt, you can’t be fully in control of your finances because someone else is directing where your money goes each month. No bueno.

Here is your homework. Look at your expenses from the past few months (or the next few months if you just started tracking them) and create a spending spreadsheet like Sue’s. Figure out your savings rate, or, if you are spending more than you are making, figure our how much you are going into debt each month.

Next, decide which categories of spending you can completely eliminate or reduce. I recommend doing this exercise even if you have a decent savings rate. Eliminate all expenses you possibly can for one month and then reevaluate the next month to see how it went. Did making coffee at home instead of buying it out really ruin your life? Can you survive with just one streaming subscription at a time? Think about it this way, if you spend all the money you earn, are you really even earning it? If it merely passes through your bank account to be exchanged for overpriced lunches and drinks, you really aren’t earning anything. You are just passing along your hard earned money away every single day. Don’t you want to keep some for yourself?

Now, if you are going into debt each month, you absolutely have to be aggressive with this task and hold yourself accountable to sticking with it. If you are someone who would like help making your spending chart and going through expenses, email me! I would love to help and do a case study (anonymous) on the blog!

Some practical tips for saving money that you have probably heard before:

A classic beans rice and hot sauce lunch

A classic beans rice and hot sauce lunch

  • Pack your lunch every single day. Make a bunch of rice, beans, and vegetables every week to pack or cook extra of what you cook for dinner every night and take it to work. You will pay less than $2 for your meal instead of $12. If you have to eat out for work purposes and the company isn’t paying, order a tiny salad or soup or something and eat your actual lunch before/after. Yes I actually do this.

  • Cook dinner and care less about what you eat. I used to be obsessed with making sure I got animal protein in at every meal and every meal was perfectly balanced. Now I will literally eat rice and beans and hot sauce for lunch 4 days a week and be happy. My body doesn’t need expensive meat 3 times a day. In fact, it doesn’t even need it once a day. Being more relaxed with my diet has saved me a ton of money. And guess what, my body is just fine. I haven’t gained weight or lost muscle or fallen into a pit of unhealth. Nothing has changed. I am not advocating for cashing in the chips on a healthy diet. Just the opposite. Eat more simply: eat food, mostly plants, not too much. FYI: plants are cheap.

  • Don’t buy drinks out. Just don’t do it. Pre-game, pack a flask, decide you are sober, whatever it takes. I used to take a flask of whiskey when I was meeting people out (including dinner at restaurants) and get a coke and sneakily be my own bartender. I get that is likely/definitely frowned upon, but the amount of money I have saved has to be in the thousands. Now I am married to a man who loves craft cocktails that cost $20 so we splurge about once every 2 months on some nice drinks. But only 2…. each…

  • Say no to expensive activities or find ways to participate for free. Love live music? Work on the clean up crew and get free tickets. Love yoga? Find free classes or do free YouTube videos. Everyone will have their expenses they can’t give up but get creative about how you get what you want. I have to belong to a gym, but I chose the local rec center which is $30/month and offers included yoga classes. Decide that you love urban hiking. The free-est of activities because you don’t even have to drive to a trail.

  • Buy your car used, in cash. Car payments are unacceptable. Don’t lease, don’t finance. Period.

  • Bike to work or use public transportation. Driving is expensive and dumb, just ask Mr. Money Mustache.

  • Stop buying clothes or only buy used.

  • Live with friends. I am 29 years old and have never lived alone. When you live with roommates you are able to share household expenses like utilities and internet and have cheaper rent. I am now married and own a home, guess what. We still have a roommate who pays half of our monthly mortgage payment. A lot of people think we are a little crazy, but saving $1000 a month is live changing. $12,000 a year extra that we can invest. Other friends I know put their house on airbnb which is also a great way to get more value from your house.

Spending money is a habit and we all know habits are hard to break, but you can do it! Remember, all you actually NEED is a place to live, food to eat, and a way to get to work. Everything else is discretionary spending that you should question thoroughly.

Now that you have cut your expenses and are cash flow positive each month, in the next post we are going to talk about what to do with that extra moolah you are paying to yourself.

Annie LawsonComment