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Tuesday, December 11, 2012

Don't ignore fixed costs!

Most personal expenses can be categorized as either a fixed cost, or a variable cost. Fixed being something that is the same every month, like rent, and variable being something that changes like gas, food, electricity.

Those of us who are trying to attain financial independence are always tracking costs and expenses and attempting to lower them as much as possible.

Most of the frugality is usually focused on the variable costs because your behavior and spending habits can vary those costs greatly, so they are usually the easiest to dramatically lower.

The fixed costs however, are usually what make up the majority of your monthly expenses, so it is super helpful if you can lower these at all. But many savers almost completely ignore these, assuming that fixed costs are stuck at that level. But this isn't always true, and a lot of times there are things you can do to lower your fixed costs, so never assume they are off the table. Even bills with contracts can be adjusted many times  with very little effort.

I'll cover a few of these fixed costs and some things you can do to change them.

 - Mortgages and rents.

Many people bought their houses or signed their leases before getting serious about their financial independence, and so they have loans or leases that they wouldn't get if they had to do it all over again.

For rent, ask your landlord about their policy for breaking the lease. Most of the time there is at least some option for getting out, even if it involves paying some fees. But if you can move to a place that is a lot cheaper, you may be able to make up the difference in only a couple months. Especially if the new place will help you save money in areas other than rent as well, such as less gas by being closer to your work, less electricity, whatever.

If you can't break the lease, see if subletting is an option. You get a new place and rent your current place to somebody else. Maybe even for more than you are paying!

With mortgages, refinancing is always something to look into, especially with today's historically low interest rates. Also consider selling if the place you are in is really too much. Or even renting out your house and then renting a much cheaper location for yourself.

The fixed cost of a mortgage also includes the interest you end up paying, so one counter-intuitive way to lower your spending is to pay more. Just an extra $100 extra a month toward my mortgage is going to take 8 years and over $30,000 of my total payments. Just remember to budget properly for the extra payment.

 - Debts and loans

You should be trying to aggressively pay off any debts anyway, but take the time to see if consolidation is an option. Only do it if you can lower your total amount paid though. Don't fall for tricks that lower your monthly payment but increase your total obligation by spreading the term out.

It is also possible to save some interest by transferring balances to a card that has a year of 0% interest so it is not getting any bigger. You must be careful with this method though and make sure you can pay it off completely before the year is up, or else you get slammed with the interest for the whole year. Be sure to do the math and read the fine print before messing with this type of thing, but it can be done.

- Insurance

You should occasionally be getting quotes from other companies and comparing. Never assume you are getting the best possible deal. Even if you don't want to switch companies, you can use the fact that a better deal is out there as leverage, and try to negotiate a better deal with your company. It can't hurt to try.

For car insurance ask about good driver discounts or loyalty programs, or reduce your annual predicted mileage. For any type of insurance you should raise deductibles to the highest amounts feasible for your situation.

- Cable

 You better be joking

If you have any tips for reducing so-called fixed costs, post them in the comments.

-The Money Monk

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