Personal Finance —Ep.99 - How to Cut 10% of Your Budget Without Worsening Your Quality of Life

📸 IG handle: DollarSenseLA

MONEY IS LIKELY TO BE TIGHTER IN THE COMING MONTHS

As of May 28th, 2020, there are over 40M people in America who have filed for unemployment. Sure, the stimulus check ($1,200) and the padded unemployment insurance ($600/week) are keeping people afloat for the next few months. But the outlook after unemployment benefits run out in August is gloomy. Just imagine millions of people rush out at the same time to compete in an already shrinking job market.

Just like coronavirus can overwhelm hospitals, a sudden outpour of job applicants can also overwhelm the job market. Moreover, some jobs are sadly permanently lost. Based on the estimate from the University of Chicago, 42% of the jobs aren’t coming back.

With a gloomy outlook for many, it is time to think about how to cut spending to deal with a potentially tighter income down the road.

THE DUAL GOAL: CUT AT LEAST 10% SPENDING WITHOUT WORSENING QUALITY OF LIFE BY 10%

In my opinion, this is how you know you handled your spending cut successfully. First, you find a way to cut your spending by a meaningful amount (at least 10%). Second, in doing so, the reduction in quality of life is less than the reduction of spending.

The primary objective is to cut your spending by a meaningful amount. If a person spends $5,000 a month on average, cutting $50 is just too small to make a deep impact. As a general rule, cutting out at least 10% would be a meaningful amount. For the example above, the goal is to cut >$500/month ($5000 x 10%).

The secondary objective is to make sure the reduction in quality of life is less than the reduction of spending. For example, if you cut 10% in spending, your quality of life should only go down less than 10%. This is generally achieved by focusing on cutting frivolous spending.

THE STRATEGY

Here are 3 tactical strategies to help you cut spending without making life too much worse off.

Cut what you don’t need: We often buy things we don’t need or use. For example, during Covid, many are working from home or not working for the time being, which causes the usage of a car to go down significantly. If you only use your car once or twice a week now, you may want to cut spending by lowering your car insurance.
Split the costs on digital products: It could make sense to consider splitting costs among multiple families and friends to lower your cost on digital subscriptions. For example, if you have been paying Youtube Premium or Spotify Premium, you can sign up for the family plan and split the cost with up to 6 people. By doing so, you are essentially lowering Youtube Premium to $3 and $2.5 each, instead of the individual plan of $12 and $10 per month respectively.
Refinance your debt: Interest rates are at a record low across all financial products. This means you should consider refinancing your primary home mortgage if it is over 3.5%, student loans if it is over 4%, and investment property mortgage if it is over 4.5%.

THE CHECKLIST

I understand each individual’s situation is different, and this list is just a starter and it will not cover everyone’s needs.

Things you may not need right now:

Car insurance: As my first job, I worked on price modeling at an auto Insurance company. In my opinion, here are 3 main places you can cut to save money on car insurance.
1. Reduce base rate: The pricing of auto insurance begins with a base rate, which is determined on the location (zip code) of the car. Typically, the base rate is higher in a city than in the suburbs because accidents are more likely to happen. With everything else being equal, if you can update the address of your car to a more suburban place (say your parent’s address), you will be able to save.
2. Lower liability coverage to state minimum: You shouldn't lower this if you drive frequently. However, if you drive less now due to Covid, it may be a good choice for you to lower the liability coverage to the state minimum so you can save. The liability coverage basically covers your expenses when you cause an accident, in other words, when it’s your fault.
3. Get rid of Comprehensive(Comp) & Collision: Comp and Collision coverages are extra. You don’t have to have them if your car is fully paid off. If you own the car outright, it could be good to consider removing them so you can save more. If you want to choose one between the two of them, I recommend removing collision, because it is typically the less used, and more expensive one.
In-App Food Ordering: Since many restaurants are closed for dining in, a lot of us have resorted to ordering food online, via apps, such as Grubhub, Postmates, Seamless, Uber Eats or Doordash. Ordering food from apps is always (yes always) more expensive, due to inflated food prices, delivery fees, service fees and tips. In fact, according to the research from the New York Times (see charts below), they are at least 25% more expensive, and sometimes can even be up to 91% more expensive. Here’s what you can do.
1. Order less: The best way is obviously to order out less. But we are all human. If you want to order and save, look at #2 and #3.
2. Calling always saves money: When you bypass the app by calling directly, you will save money because the price in the app can be over-inflated compared to price in store. Additionally, you are not paying app service fees, delivery fees, and a tip.
3. If you don’t want to call, order from the app for pick up: If you don’t want the inconvenience of calling, the other way of saving money is to place an order in the app for pick up. You can save substantially because you don’t pay for the delivery fee, service fee or the tip.
Online Shopping: Online shopping, especially Amazon, is a significant source of spending for many, actually even before Covid. In fact, the average Amazon Prime member was already spending $1,400/year in 2018. I don’t personally have an effective tool to curb spending here. Perhaps the easiest way is to remove the app from the phone for a month or two.

Research on how much more expensive ordering from delivery apps can be, according to the NYT.

https://www.nytimes.com/2020/02/26/technology/personaltech/ubereats-doordash-postmates-grubhub-review.html

Digital subscriptions you can possibly split the cost:

Netflix (save 65%): If you can get 5 people on board, you should sign up for the 4-screen (5 profile) family plan ($15.99), so your cost is only $3.2/month, instead of the individual plan of $8.99.
Hulu (save 50%): You can have 2 people stream Hulu simultaneously. If you can get another person on board, you should sign up together for the ad-supported plan ($5.99) or the ad-free plan ($11.99), so your cost is only either $3 or $6.
Spotify (save 75%): If you can get 6 people on board, you should sign up for the family plan ($14.99), so your cost is only $2.5/month, instead of the individual plan of $9.99.
Youtube Family (save 75%): If you can get 6 people on board, you should sign up for the family plan ($18), so your cost is only $3/month, instead of the individual plan of $11.99.
HBO Max (save 66%): You can have multiple profiles and 3 people stream HBO Max simultaneously. If you can get 3 people on board, you can split the cost of $14.99 to make it $5 per person.
Amazon Prime (save 50%): You can share Amazon Prime with another adult household member, who can have his/her own login and profile. This way, you can lower the $120 membership to $60 per person.
News Subscriptions Through College: Many universities offer alumni access to digital news subscriptions. Specific benefits vary by college. Personally, I can get both my New York Times ($4/month) and the Wall Street Journal ($19.5/month) for free from Dartmouth College. It may be good to check what’s available for free from your own university.

Financial products you can refinance right now:

Primary home mortgage: If your mortgage rate is over 3.5%, you can most likely save money through a refinance, even taking into account the fees associated with it. Shop around. Start with the bank you already use (such as Chase, Bank of America, and Wells Fargo). I also recommend taking a look at LenderFi, SchoolsFirst Credit Union or First Republic Bank, all of which I have personally used.
Investment home mortgage: Mortgage rates on investment properties are typically at least 0.5% to 0.75% higher than the rate on a primary home, because investment homes carry more risks. The reason is simple. When one can’t afford both properties, one is more likely to save the primary home one lives in, and defaults on the investment home. If your rate is currently over 4.5%, it would be good for you to shop around as well. Personally, I have seen rates lower than 4% in recent days (May 2020).
Student loans: Typically I recommend First Republic for student loan refinancing. However, very recently, they have stopped operating in this business, probably due to the overwhelming applications and potential concern on the default rate. Here are some options to take a look. But I would recommend monitoring First Republic bank, as historically have had the lowest refinance rate. When they offer this business again down the road, it could very well still be the lowest in the market.