Hacking your biggest expenses is one of the most effective ways to pay off debt and start building wealth. I am a big believer in doing this and attribute my success in paying off over $55k in student loans to hacking my most significant expenses first.
Related Post: 4 ways I saved $ and doubled my Student Loan payments
Seriously, if you can successfully implement hacking your most significant expenses, you will set yourself up for accelerated success to accomplishing your money goals. Failure to hacking your top expenses will keep you in debt way longer than you need to be. It will likely keep you working a job you might not enjoy longer than you need to as well.
Tracking your expenses is the only way you can truly understand what your most significant expenses are.
“What gets measured, gets managed” – Peter Drucker
If you haven’t already, I recommend using software like Personal Capital or Mint to start tracking your money. I use both personally but use Mint almost every day. If not, download your bank statements to an excel spreadsheet and track your expenses manually. It doesn’t matter how you do it, but it’s essential that you start tracking your expenses today. Once I started tracking my expenses in late 2014, I had a better mindset and became motivated to pay off my debt and track my progress.
Track you Finances closely this year
Reviewing my largest expenses (in the last two years)
First, just ignore the “education” bucket because that accounts for my Student Loan payments for the previous two years. I became debt free in April, so my education bucket is showing a smaller % now.
After education, my biggest expenses the last two years are home, auto, and food. Let’s look for ways I am hacking those expenses and how I can do more in the future.
Keep in mind this is after-tax income that I am tracking. Don’t forget about hacking your biggest expense overall – Taxes.
Related Post: Make a Plan for Your Taxes
Hacking your Housing
Some people negatively stereotype having roommates. If you are out of college, people think you need to move into your own place. Don’t listen to stereotypes – having roommates will save you 50 to 75% of your potential housing costs at a minimum. That should be motivation enough to look at this option.
If you are in debt and your housing costs are over 30% of your income, you NEED to get at least one roommate to cut your housing expenses in half. If you don’t have a roommate now to share costs, you should start planning now.
Renting out room(s) on Airbnb
This option only works if you own the building where you live. Unfortunately, most apartments strictly forbid the use of Airbnb to rent out your apartment.
The beauty of Airbnb is you have the power to set your schedule when you want to rent out a room (or your entire house). There seems to be a negative stigma for some people with the idea of letting someone random stay at their place. Many people are stuck in their ways, but if you can get over this negative stigma Airbnb is a great way to turn one of your largest expense into an income producing asset.
Like many platforms in the sharing economy, Airbnb has a rating system for each user, and you don’t have to rent to people with bad ratings. You can essentially be selective on who you let stay in your house.
If you own a house with extra bedrooms, I would recommend giving Airbnb a try. Once I move from renter to buyer, I will be using the platform to hack my housing.
Check out the post from the financial panther blog: Making Money with Airbnb
Duplex or Triplex
Buying a Duplex or Triplex might be down the line for some people who are currently in debt.
Now that I am debt free, I am considering going down the path of saving for a duplex rather than a single family home. Living in one unit and renting out the other unit turns your housing expense into an income producing asset (seeing a theme here?). I am saving up so I can put down a 20% down payment. With a 20% down payment, I can get a favorable mortgage rate and monthly payment and avoid Private Mortgage Insurance (PMI). By owning a Duplex, you have the power to vet and choose your next door neighbor. You also have the flexibility to move if needed, because you can find a new renter for your unit (rather than being forced to stay in a lease). You can also still Airbnb out your place too.
Hacking your Car and Commute
Buying a reliable used car
Cars are depreciating assets and turn into liabilities. To pay off debt and build wealth, you have to focus on increasing income producing assets. Having a brand new car might seem reasonable in the short term, but it is actually a poor long-term decision (especially if you finance or lease). Your vehicle should be used to get you from point A to point B. Don’t take on additional debt to have a nice comfortable ride. Buy a reliable used car (like Toyota, Honda or other highly rated used vehicles) with cash if possible.
I bought a used 2010 Toyota RAV4 and ended up taking a small loan of ~$4k (@ a 1.65% interest rate) after paying the majority with cash. My car was paid off my car in April of 2017 once my after paying off my higher interest student loans.
I keep up with maintenance and do all the work myself (and with help from family if required) to save on costs. My next car (after 10+ years hopefully) will be used and paid in cash.
Related Post: My first used car buying experience
If you live in a city chances are you have an extensive public transportation system. Here in Austin, it costs $2.50 round trip to get from my house to downtown. Comparing the cost of my gas per month, taking public transportation would save ~50% each month. If public Transportation is an option for you, it can be a great way to reduce your gas expenses. Plus, it will free up time that you could be doing more productive things rather than driving.
Live close to your work
Outside of not having a car payment, living close to your work can be one of the most effective hacks to reduce your auto expense. If you can walk or ride a bike to work, you are hacking the system. Walking or biking to work is excellent because you are
1. Saving money on auto expenses
2. Getting Exercise
3. Saving time
If you continue to sit in a car in traffic five days a week, you are losing 1. Money 2. Time 3. Your health (mental and physical)
Make the intentional decision to move closer to work or find a new job that is close to your home. I currently live about 8 miles away from my job, and it takes me about 20mins to get to work. My new job location was a significant improvement after my previous job changed locations to about 30 miles away from my home. I am looking to improve my situation in the coming year to be within 2 miles from my job.
Turn your car into an income producing asset
If you have a car and don’t use it all the time – consider renting it out on Turo. Turo is like the Airbnb for your vehicle.
You can also drive for Uber or Lyft to turn your car into an income producing asset.
If you are going to use these services, I would recommend using them only on occasion. Cars are depreciating assets, and the value of your vehicle goes down with more miles driven. The profit you make from these driving services cut into the value of your car, so it doesn’t seem valuable long term.
Hacking Your Food Costs
Batch cook & Prepare meals ahead of time
Find recipes online to cook on the weekend that will last the entire week. I have found a few recipes through facebook groups that cost $2 per person per meal. That is now my goal each time we cook. Do the math of how much it costs to produce a particular meal and how many meals it provides. Utilizing a Crock Pot or Instant Pot can help create great meals for cheap and relatively easy.
Limit Eating Out
Eating out is both expensive and most of the time unhealthy. While it’s ok to eat out on occasion, it shouldn’t turn into multiple times a week thing. Do your best to prepare food ahead of time, so you are never eating out because you didn’t make food before.
When you do eat out, try to plan weeks in advance.
The best way I know to eliminate debt fast is to focus on hacking your biggest expenses. If you do this, you will be miles ahead of your peers. Don’t get too comfortable with your situation, find ways to optimize and be different than the crowd.
Remember: Focus on turning your largest expenses into an income producing asset. Also, you will generate more wealth in the future when you focus on ways you can scale your “hacking”.
Question for You!
What is your most significant annual expense and whats your plan to reduce it?
Have you ever turned an expense into an income producing asset?
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Financial Panther says
Good stuff man. Definitely all about reducing the costs of the big stuff when it comes to paying off debt. Housing, transportation – if you can reduce those costs, you can really free up a bunch of extra cash. Live like a student for a few more years!
Yes, you summed it up best – “Live like a student” – roommates, biking, take the bus, low food costs, etc. Best way to reduce your expenses!