All too often we focus on cutting out the little things (like a daily cappuccino), when we should really focus on our major expenses for the biggest impact. Here are seven areas we spend or waste the most money—and how to plug those leaks.
Where We Spend the Most Money
The graphic above breaks down how the average US household spends their paycheck, according to the US Department of Labor. As you can see, housing, transportation, and food are the biggest costs. Because they take so much out of our paychecks, it makes sense to concentrate on reducing spending in these areas.
Where you choose to live will make a huge difference in how much you’ll pay not just for housing but also the other cost of living items. Sometimes even moving just a town or a few blocks away can be much less expensive. If you have the flexibility of moving, Sperling’s Cost of Living Calculator can help you evaluate different cities. (And if you’re moving to a new country, check out Expatistan’s Cost of Living Index, which compares typical costs across 1,560 cities, according to user-entered data.)
Another option is to get a roommate to share the housing costs or, if you’re a homeowner, refinance to a better rate.
Utilities take up 7% percent of the total expenses. Even if you’re renting, you can still save on your energy bill with small but smart measures like using insulating curtains and using your appliances more efficiently. You can do an energy audit yourself to find the energy leaks in your home, and some utility companies offer free assessments as well.
Transportation is the second biggest expense. Gas and motor oil account for 4.8%, while vehicle purchases (i.e., car payments) account for 6.5%. Again, if selecting where you move is an option, choose a location as close your workplace as possible. It could save you not just time, but potentially as much as $125,000 in ten years. Even better: convince your boss to let you work from home.
Also, the average household has roughly two cars. Do you really need the second car? If you can swing it, you can save thousands by getting rid it.
Finally, food is the last of the three biggest expenses. We’ve shared tons of tips over the years for how to save money on groceries, including:
It takes a bit of time to learn to make good, inexpensive food and shop smarter, but the payoff can be huge.
The other part of the big food budget is eating out—something many of us enjoy or do when we’re too tired to cook. Changing your dining out habits could save the average American hundreds if not thousands a year, and it doesn’t have to be a big sacrifice either. Besides eating out less, you can save money when dining out by timing when you go out and ordering wisely.
Where We Waste the Most Money
Besides looking at the major expenses above, you’ll also want to make sure you’re not throwing money away or overpaying for anything. With that in mind, here are the budget items you should pay close attention to, in addition to other financial blind spots.
Any Kind of Loan
If you can reduce or eliminate the interest on any kind of debt—whether it’s a car loan, mortgage, or credit cards—do it. Carrying credit card debt, especially if you only make the minimum payments, is a particularly terrible move that can cost you thousands in addition to lowering your credit score. If you’re carrying that kind of debt, make a debt reduction plan to dig yourself out as soon as possible. Also, boosting your credit score can improve your spending power and save tons on big purchases like a home.
If you itemize your tax return, claim every last deduction you can. Not doing so is just handing that money over to the IRS. See the IRS’s guide to itemized deductions and Kiplinger’s list of the most overlooked tax deductions so you can plan accordingly.
Life and other personal insurance account for only 0.6% of the average budget, but getting a lower rate is so easy to do there’s no reason not to. You can save on car insurance by taking an online driving course. Combine insurance policies to get a discount. And simply call and comparison shop each year to make sure you’re getting the best rates.
Finally, the average household spends about $2,700 a year on entertainment. The first thing people think to do is ditch cable television because the cost is pretty outrageous when there are free or much less expensive options. There are also tons of ways to have fun without spending a cent. See The Simple Dollar’s list of 100 such ideas.
Figure Out Where You Can Cut Back
The list above should help you find more room in your budget, since they’re the seven biggest expenses or money wasters. For even more savings and advice, check out our guide to saving money on all your monthly bills.
Of course, your own spending habits might differ from the average person, so you’ll also want to track your budget (e.g., with Mint) and see where you money really goes so you can start saving more of it.
Photo by Images_of_Money.