Chapter 1: Which Expenses Should You Pay Off First?

Without a solid plan on how to tackle your runaway expenses, everything can feel all too overwhelming and confusing. While you should endeavor to cut expenses on literally everything, it makes sense to start by targeting certain aspects of your expenses because these might have the biggest impact on saving you more money. What's more, you might realize that cutting expenses on specific aspects might be a lot easier than others.

So what strategy do you use to determine which expenses to start lowering?

Well, the best approach is to reverse-engineer some of the popular budgeting approaches like the famous 50/30/20 approach popularized in Senator Elizabeth Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan."2 The rule revolves around dividing your after-tax income and allocating: 50% to needs, 30% to wants, and 20% to savings.

Let me elaborate on what 'needs,' 'wants,' and 'savings' mean because this is important.

Dedicate 50% Of Your Take-Home Income On Needs

Needs, in this case, are those payments you cannot avoid - those things whose failure to pay could have a significant impact on your quality of life. 50% of your income should cover these expenses, and if you find yourself going beyond 50% on just needs, find ways of lowering these expenses.

The specific cost items in this category include electricity and gas bills, minimum loan payments, basic groceries, insurance (for pets, car, healthcare, etc.), transportation, rent, mortgage payments, taxes, etc.

As you are well aware, if you don't pay these, you risk being homeless, having your heating and lighting disrupted, getting court summons, compromising your credit score, and more.

Even if your expenses in this category are lower than 50%, don't just settle; always be on the lookout for ways to lower your monthly payments because it will ultimately ensure you have more money to pay off outstanding debts.

For example, you can switch to a cheaper heating and lighting provider or make your home more energy-efficient. You can also look for cheaper insurance products, move to a smaller house or cheaper neighborhood, carpool more often, use public transport more often, buy in-season groceries, and much more. Ultimately, in so doing, you could end up saving a significant amount of money.

Here are more specific tips on how to cut expenses on different types of needs:

• Food and groceries

According to a survey conducted by The U.S Department of Labor on Consumer Expenditure3, Americans spent an average of $6,602 on food alone! And this doesn't seem to go down any time soon.

To minimize this expense, try the following: -

• Buy food less frequently - Buying food in bulk will save time, money, and gas.
• Pay with cash and carry your grocery list - This ensures you stick to your shopping list.
• Buy in season - If you fancy some foods, buy them while they're in season. You can preserve them through canning for use when they are out of season. This approach will save you a ton of money in the long term.
• Cook cheaper meals - Instead of serving big portions of ingredients like meat, change to larger portions of rice and other such ingredients. This is the best opportunity to check out the healthiest and cheapest diets available and watch how much money you'll save!

• Energy and car gas expenses

The best way to lower your heating and lighting costs and car gas expenses is to switch to cheaper energy sources. For example, if you opt for weather-stripping or caulking doors and sealing windows, you will keep the cold out and the heat low, thereby lowering your heating and cooling bills.

You can also:

• Invest in a programmable thermostat to help you turn up the heat or air conditioning.
• Switch to energy-efficient light bulbs to reduce energy expenses.
• Practice efficiency - Practice cleaning and changing your furnace, air filters and wrapping your hot water heaters. These measures ensure that your appliances will run more efficiently.

• Tax expenses

Failure to pay taxes is the biggest thorn in most people's finances. This is because tax evasion attracts the IRS, and when they catch up with you, their repossession measures can leave you bankrupt.

Here are ways of reducing this expense and the amount you will pay:

• Take advantage of the fall season - Most states sponsor reprieves from sales tax as part of back-to-school shopping, so this is the best time to reduce this debt. In most cases, this typically happens from the last week of July to mid-August.
• Take advantage of tax breaks - Some eligible taxpayers do not take advantage of the income tax credit or EITC that can be worth $6,143 per year, depending on your income, marital status, and whether you have any dependents.
• Maximize retirement savings - If your company offers employer-sponsored plans like 401(k) or 403(b), you can make pretax contributions up to a maximum of $19,500. These contributions -mostly saved in an employer-sponsored retirement account- are the best way to lower your tax bill.
• Take business deductions - If you're a full-time or part-time self-employed taxpayer, you can lower your taxable income by checking out the list of deductions available to you. For example, if you have a home office, your tax is calculated using a simplified method to reduce your taxable income if you use a portion of your home for business purposes.

Dedicate 30% Of Your After-Tax Income To Wants

Wants, in this case, are those expenses that are not really essential and you can live without - you can think of them as discretionary expenses, i.e., things you choose to spend your money on even when you can live without them. Some of these include dining out, vacations/holidays, gym memberships, cable T.V., other entertainment subscriptions, some groceries (those not essential), buying clothes, and many others.

This is one area you can cut your expenses heavily because all these expenses are things you could live without if push comes to shove. Millions of people worldwide live all their lives without a majority of these 'wants,' so committing to keep your expenditures in this category to the bare minimum should be your goal.

Ask yourself:

How badly do I want to get out of debt and possibly avoid having to file for bankruptcy? If you want to get out of debt so badly, you will do everything in your power to keep expenses relating to this category at a minimum.

For example, you can cancel your gym membership, skip the vacation/holiday and opt for a 'staycation,' and learn to prepare restaurant-style meals -you can search for 'Copycat recipes/cookbook" on Amazon to get recipes and learn how to replicate recipes from top U.S. restaurants. You can also cancel your cable and other subscriptions you don't even use, and avoid buying new clothes so often.

Dedicate At Least 20% Of Your After-Tax Income To Money Savings And Paying Your Debts

While the original creator of the 50/30/20 rule recommended dedicating up to 20% of after-tax income to savings, my recommendation right now is to aim higher with the changes you may have made in your finances so far.

I know the fact that you are already neck-deep in debt means you probably don't even have anything to spare to save and pay your debts. If you've been committed to cutting expenses in the first two categories above as described, you should manage to save a good amount of money that you can direct towards saving and debt repayment.

Here are some tips that will help you save money on the different expense items:

For your vehicle:

• Practice good driving habits - Refrain from overspeeding and maintain your speed. This will improve your vehicle's fuel efficiency by 17%, saving you money in the process.
• Pump up your tires4 - Tires tend to lose about a pound of pressure every month, so it is important to keep them inflated. Also, clean your car because by hauling around 100 extra pounds, you'll be lowering your car efficiency by around 2 percent.

Car insurance expenses

The best way to reduce your car insurance costs is to have a blameless driving record. Other ways you can reduce your car insurance costs are:

• Shop more

Since there are no fixed insurance prices, you should shop around more. It is advisable to get at least three price quotes to help you compare and choose one. You could call the companies directly or get more information from the internet. You can also get the much-needed information from state insurance departments near you.

• Compare the cost of car insurance before you commit to buying a car

Most car insurance premiums are based in part on the car's price, repair costs, overall safety records, and theft concerns. So to help you know the best car to buy, you can get the information you need from The Insurance Institute for Highway Safety.5

• Request for higher deductibles

Deductibles are the costs you pay before your insurance policies come into effect.

For example, if you decide to increase your deductible to $500 from $200, you could automatically reduce your collision and comprehensive cover by 15 to 30%. If you can increase your deductible to...