Monday, May 25, 2009

Cutting Costs and Saving Money

Cost Cutting” – This is a term that we are hearing day in and day out ever since the recession started. Though the economy seems to be stabilizing these days, the term cost cutting is still on the cards. Large organizations even conglomerates have introduced measures to cut their costs. They have cut jobs, reduced salaries, cut back on bonuses, avoided lavish spending on expansion plans etc. As employers they are taking steps to reduce their cost. As employees it is our duty to cut our costs too, to ensure that we do not end up spending more than what we earn.

A simple example. Let us say Mr. A, has an income of Rs. 50,000/- per month. He spends nearly 45,000/- of his salary every month on routine expenditure and saves the remaining 5,000. Assuming his employer introduced a 10% pay cut to cut costs, he would end up spending all his money and thereby his savings would turn out to be ‘0’ This is not an ideal scenario. If Mr. X follows some simple strategies, he may end up cutting his expenditure by Rs. 5,000/- thereby adjusting his spending with his income and at the same time continue to save money like he used to before.

The most important point to note here is the fact that, most of the essential commodity prices are on an upward movement always. So, if our salary is not rising the way these prices do, we may end up with not enough money to buy them. We would have to compromise on our living standard. This is not something that anyone would want to do.

All said and done, what are the things that we spend on every month? Food, groceries, clothes, etc etc. Let us have a look at some simple strategies that can help us achieve around 20% savings in our expenditure.

Where to cut costs?

Before deciding on how to cut costs, we must identify the areas where we can cut costs. We must identify the areas where we spend a lot of money every month.

1. Food & Groceries
2. Transportation & Communication
3. Education
4. Clothing & other accessories
5. Entertainment

Before going into the details, let me make one thing very clear. These are strategies that can help you cut costs by around 20% on your monthly total expenditure. The best thing we can do is, implement these steps, reduce our expenditure and “Save the surplus money for a rainy day

1. Food & Groceries

Food & other grocery items for the house contribute to nearly 40% of our monthly expenditure.

a. Buy at discount stores. Large retail chains offer attractive discounts for people who buy stuff in bulk. Plan your grocery requirements before hand and buy them in bulk to take advantage of the discounts and offers available.
b. Reduce non-vegetarian food consumption. Switch to vegetarian items. It is healthy and at the same time cost effective too.
c. Cut out junk food

Target cost saving = 15%

2. Transportation & Communication

Transportation is an important area where we spend a bulk of our money. Nearly 10-15% of our monthly expenditure is spent on transportation & communication. This includes petrol bills, car/bike maintenance costs, telephone bills etc.

a. Do car pooling
b. Switch to a fuel efficient car. Forget those fuel guzzling SUVs and switch to sedans and smaller cars which offer us a better mileage.
c. Bundle land line, mobile and internet connection with one operator (If he is offering discounts for availing all services from him)
d. Change your tariff plans. Discontinue services that you do not utilize fully.
e. Switch to pre-paid if you do not keep a tap on your phone calls

Target cost saving = 10%

3. Education

Education is an area where scope of cost cutting is very difficult. It contributes to nearly 10% of our monthly expenditure. We cannot possibly try to shift our children to schools/colleges that ask for lesser fees, after all their education quality is extremely important and decides how successful they are in their career. But, here too we can squeeze in a bit of saving.

a. If you have multiple children, try to re-use the books used by the elder child
b. If you have a PC, check out options for online learning.
c. Do not buy everything for the schooling year every year. Try to re-use last years stuff like bags, shoes etc that can be used for a few more months.

Target cost saving = 5%

4. Clothing & other accessories

Clothes and apparels contribute to decent chunk of nearly 10% of our income. The kind of attire we wear, speaks volumes about ourselves wherever we go. But here too cost cutting can be done effectively.

a. Switch to private or in house brands instead of costlier brands
b. Buy at factory outlets. They are nearly 25% cheaper than showrooms.
c. Stock up during off season sale. Large brands offer up to 50% discounts during year end stock clearance sale. Use such opportunities.

Target cost saving = 25%

5. Entertainment

Everyone likes to spend time with friends and family away from home. Movies, multiplexes etc are the favorite hang out spots for people these days. We spend around 10% of our income in entertainment every month.

a. Avoid unnecessary eat outs. Eat at home, it is healthy and also cost effective
b. Explore your travel plans before going on a vacation. Book in advance. Most travel operators offer decent discounts for people who plan in advance
c. Switch to economy class from business class if you are paying the ticket charge. Your employer would have already done it, why don’t you. The air fares are comparatively lower.
d. Try downloading songs/movies instead of buying the CD/DVD.

Target cost saving = 30%

Cost Saving calculations:

Assuming Mr. X spends Rs. 50,000 every month. Which means he spends

1. Food & Groceries – 20,000
2. Transportation & communication – 7,500
3. Education – 5,000
4. Clothing & accessories – 5,000
5. Entertainment – 5,000

Total = 42,500/-

Expected Cost Savings:
1. Food & Groceries – 3,000
2. Transportation & Communication – 750
3. Education – 250
4. Clothing & accessories – 1,250
5. Entertainment – 1,500

Total = Rs. 6,750/-

If you invest this in an equity mutual fund that gives you a 15% returns per annum you would have saved up Rs. 93,150/- at the end of the year.

Doesn’t this sound nice?

Happy Spending!!!

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