Cutting Costs and Increasing Income

Welcome to Part 6 Cutting Costs and Increasing Income of our series on achieving financial freedom! In the last section, we covered Choosing the Right Debt Repayment Strategy, helping you understand the difference between popular debt repayment strategies and how to choose which one is best for you. Now with the debt repayment strategy in place, we’re ready to take the next big step.

In this Section, we’ll discuss the two powerful strategies for eliminating debt faster: reducing unnecessary spending and finding ways to bring in more income. You’ll get practical, actionable tips that can help you free up more money for debt repayment, whether by cutting back on expenses or boosting your earnings.

Combining cost-cutting with income-boosting efforts creates a dynamic approach to managing debt. It’s all about creating a larger gap between what you earn and what you spend, with the difference going straight toward paying off your debt faster.

1. Why Cutting Costs and Increasing Income Matters:

The Debt Repayment Formula: The basic formula to get out of debt is simple: spend less than you earn, and use the difference to pay down debt. However, the execution is often easier said than done. This episode gives you two clear strategies to tip the balance in your favor.
Amplifying the Effect of Each Strategy: While cutting costs can free up money from your current budget, increasing your income adds to the amount of money you can allocate toward debt repayment. When combined, these two strategies accelerate the debt payoff process, reducing the total interest you pay and shortening the time it takes to reach financial freedom.

2. Cutting Costs: Where to Start

Step 1: Track Your Spending

Understanding Your Financial Habits: Before you can cut costs effectively, you need to know exactly where your money is going. Spend one to two months tracking every dollar you spend, from your rent or mortgage payment down to your daily coffee. You might be surprised at how much is leaking from your budget through small, seemingly insignificant purchases.
Tools for Tracking: Use apps like Mint, YNAB (You Need A Budget), or a simple spreadsheet to categorize your spending. These tools can automatically sync with your bank accounts and help you categorize your expenses into clear groups like groceries, utilities, dining out, and entertainment.
Analyze the Patterns: Once you have a complete picture of your spending, ask yourself some key questions:
- What categories are the largest chunks of your budget?
- Are there any patterns of overspending (like dining out multiple times a week)?
- Are there subscription services or memberships you’re paying for but not using?

Step 2: Differentiate Between “Wants” and “Needs”

Defining Essential vs. Non-Essential: Break down your expenses into two categories:
- Needs: These are essential costs that keep your household running—rent or mortgage, utilities, groceries, transportation, insurance, etc.
- Wants: Non-essential items that improve your quality of life but aren’t necessary for survival—dining out, entertainment, travel, subscriptions, luxury purchases.
Consider Temporary Sacrifices: While cutting out all “wants” isn’t necessary for the long term, making temporary sacrifices can significantly speed up your debt payoff. For example, cutting back on entertainment or dining out for six months could free up hundreds or even thousands of dollars for debt repayment.
Set Limits: If you don’t want to completely eliminate your discretionary spending, set limits for how much you can spend on “wants” each month and stick to that limit.

3. Practical Ways to Cut Costs

Reduce Your Fixed Expenses

Housing: Housing is often the biggest single expense in most people’s budgets. If possible, consider moving to a more affordable home or renting out a spare room to lower your housing costs. For homeowners, refinancing your mortgage at a lower interest rate can also free up extra money.
Utilities: Shop around for lower rates on utilities, such as electricity, gas, and water. Consider energy-saving measures like using LED bulbs, smart thermostats, and unplugging electronics when not in use to reduce your energy bill.
Insurance: Call your insurance providers and ask if there are any discounts or loyalty programs you can take advantage of. Compare rates between different companies to see if switching insurers can save you money on car, home, or health insurance.

Slash Discretionary Spending

Entertainment: Entertainment can be a major budget buster. Consider swapping paid activities (like movies, concerts, or dining out) with free or low-cost alternatives, such as hikes, library visits, or hosting potluck dinners with friends.
Subscription Services: Go through your list of subscriptions—everything from streaming services to apps and magazines. If you’re not using them regularly, cancel or pause them. Many people unknowingly spend $50 or more a month on subscriptions they don’t fully use.
Clothing and Shopping: Before buying new clothes or household items, challenge yourself to wait at least 48 hours. This cooling-off period can help curb impulse buys. Additionally, consider shopping secondhand for clothing, furniture, or electronics.

Meal Planning and Grocery Shopping

Plan Your Meals: Meal planning is one of the most effective ways to save money on food. Set aside time each week to plan out your meals, create a shopping list, and stick to it. Cooking at home is significantly cheaper than dining out.
Batch Cooking: Consider batch cooking or meal prepping to save time and money. By preparing large portions and freezing leftovers, you reduce food waste and the temptation to order takeout when you’re too tired to cook.
Use Coupons and Cashback Apps: Apps like Ibotta, Rakuten, and Honey offer cashback or discounts for your grocery and online shopping. Take advantage of sales, coupons, and loyalty rewards to stretch your grocery budget further.

Transportation Costs

Reduce Commuting Costs: If you drive to work, explore alternative transportation options. Carpooling, biking, or using public transportation can significantly lower your gas, parking, and vehicle maintenance costs.
Downsize Your Vehicle: If you own a car, consider downsizing to a more fuel-efficient vehicle or even selling a second car if your household has more than one. Reducing car payments, insurance, and maintenance costs can free up substantial funds.

4. Increasing Your Income: Practical Strategies for Earning More

Step 1: Assess Your Skills and Opportunities

Skills Inventory: Begin by taking an inventory of your skills, talents, and interests. Are you good at writing, graphic design, tutoring, or coding? Do you have a hobby that could be monetized, such as photography, crafting, or personal fitness?
Exploring Side Hustles: Think about how these skills can translate into a side income. For example, you could offer freelance services, tutor students, walk dogs, or even sell handmade goods online.

Step 2: Popular Side Hustle Ideas

Freelancing: If you have a skill like writing, graphic design, web development, or video editing or any other skill that you can offer then you can offer your services on freelance platforms like Upwork, Fiverr, or Freelancer. Freelancing allows you to earn money on your schedule, making it a flexible side hustle.
Selling Online: Platforms like Etsy, eBay, and Amazon make it easy to sell everything from handmade crafts to secondhand goods. This could be a great way to declutter your home from all the unwanted or unused items while earning extra income.
Gig Economy Jobs: Depending on where you are in the world, apps like Uber, Lyft, DoorDash, or TaskRabbit offer the opportunity to earn extra income on a flexible schedule. While these jobs might not be long-term solutions, they can provide quick cash to put toward debt repayment.
Teaching or Tutoring: If you’re knowledgeable in a particular subject, tutoring can be a rewarding and well-paid side hustle. You can offer your services locally or online through platforms like VIPKid or Chegg Tutors.

Step 3: Negotiating a Raise or Promotion

Assessing Your Current Job: Sometimes the best way to increase your income is within your current job. If you’ve been consistently performing well, consider asking for a raise or promotion.
How to Prepare: Before asking for a raise, prepare by documenting your contributions and how they’ve positively impacted the company. When you present a solid case, employers are more likely to consider giving you a raise or promotion.
Timing: Timing is crucial when negotiating. Look for times when the company has had a strong performance or at your annual performance review to bring up the conversation.

Step 4: Passive Income Opportunities

What is Passive Income?: Passive income is money earned with little ongoing effort, usually after an initial investment of time, money, or resources. While passive income streams may take time to establish, they can offer long-term benefits.
Examples of Passive Income:
- Real Estate Investing: Renting out property or even a spare room through platforms like Airbnb can provide a steady stream of income.
- Digital Products: Consider creating and selling digital products such as e-books, online courses, or printables. Once created, these products can generate ongoing sales with minimal maintenance.
- Investing in Dividends: If you have savings or investments, look into dividend-paying stocks or bonds that offer regular payouts.

5. Combining Both Approaches for Maximum Effect

The Power of Cutting Costs AND Increasing Income

Synergy for Maximum Results: While cutting costs and increasing income are both powerful on their own, combining these two strategies is the key to accelerating debt repayment. By spending less and earning more, you can free up a significant portion of your budget to direct toward your financial goals. When you reduce expenses and supplement your income at the same time, the extra money saved and earned can be funneled directly into debt repayments, shortening the time it takes to become debt-free.
A Practical Example: For instance, if you’re able to cut $200 a month from unnecessary spending and earn an additional $300 a month from a side hustle, that’s an extra $500 you can put toward paying off your debt each month. Over the course of a year, that’s $6,000 toward debt repayment—just from these two adjustments!

How Much Extra Can You Put Toward Debt?

Calculating Your Debt Reduction Power: Encourage viewers to take a close look at their own finances. How much can you save by reducing expenses? How much more can you earn through side jobs or freelancing? Once you’ve done the math, determine how much of this freed-up money can be put toward paying down your debt. This exercise can be eye-opening and motivational as you see how quickly you can make progress with this combined approach.
Debt-Free Timeline: Ask yourself, “If I redirect all this extra money into my debt repayment plan, how much faster can I pay it off?” The more you can contribute to your debt payments, the quicker you’ll reach your goal of financial freedom.

6. Overcoming Common Challenges

Avoiding Lifestyle Inflation

What is Lifestyle Inflation?: Lifestyle inflation happens when, as people start earning more money, they also start spending more. This often results in people staying stuck in a cycle of debt or not making significant progress toward their financial goals. It’s tempting to reward yourself with nicer things as your income increases, but this can easily derail your debt repayment efforts.
Fighting the Urge to Upgrade: To avoid lifestyle inflation, commit to maintaining your current spending habits, even when your income rises. Funnel any extra income—whether from a raise, bonus, or side hustle—into paying off your debt or increasing your savings instead of upgrading your lifestyle. Remember, the faster you get out of debt, the more freedom you’ll have later to spend on the things you truly want.

Staying Consistent

Consistency Over Perfection: While cutting costs and boosting income are essential steps, the journey to becoming debt-free is a marathon, not a sprint. Don’t strive for perfection but focus on staying consistent. Some months you might save more than others, or you may miss a side hustle opportunity, but that’s okay. The key is to keep moving forward, even if the progress feels slow at times.
Perseverance Through Setbacks: Setbacks are inevitable. Maybe an unexpected expense throws off your budget, or you have a month where you’re unable to work your side hustle. Don’t get discouraged—stay focused on the bigger picture. Even small, consistent steps toward your goals will add up over time.

Balancing Time and Energy

Don’t Burn Out: While it’s important to increase your income through side hustles or extra work, it’s equally important not to overdo it. Burnout is a real risk when juggling multiple jobs or working long hours, especially if it’s affecting your physical or mental health.
Finding a Healthy Balance: Be mindful of your time and energy. If you’re feeling exhausted or overwhelmed, it’s okay to take a break or scale back on your side hustles for a while. Long-term financial success depends not only on hard work but also on your ability to maintain your health and well-being. Sustainable progress is about finding balance.

7. Action Steps to Start Today

Step 1: Start Tracking

Track Your Spending for a Month: Before you can cut costs, you need to understand where your money is going. Spend the next month carefully tracking every expense, whether it’s big or small. Look for patterns and identify areas where you’re overspending—subscriptions you forgot about, dining out too often, or unnecessary shopping.
Identify Cutback Opportunities: After a month of tracking, review your spending and highlight areas where you can cut back. Whether it’s downgrading a service, cooking more at home, or canceling unnecessary memberships, you’ll likely find several opportunities to save money.

Step 2: Implement a Side Hustle

Choose a Side Hustle That Suits You: Look at your skills, interests, and availability to find a side hustle that works for you. Whether it’s freelance writing, tutoring, delivering groceries, or selling handmade items online, find something that you can realistically fit into your schedule.
Start Small: You don’t need to dive into side hustles full-time. Start with a few hours a week to earn some extra money. As you get comfortable and build momentum, you can scale up your efforts to increase your income further.

Step 3: Allocate the Extra Income

Redirect Savings and Earnings Toward Debt: Every dollar saved from cutting costs and every extra dollar earned from side hustles should be intentionally allocated toward debt repayment. Set up automatic payments if possible to ensure the extra money goes directly toward paying off your balances.
Accelerating Debt Payoff: By consistently combining the money saved and earned, you’ll see your debt decrease at a faster rate. Keep this momentum going, and you’ll be surprised at how quickly you can achieve debt freedom.

In this Section, we have covered the importance of cutting costs and increasing income, practical strategies to implement both approaches, and how to stay motivated and avoid burnout along the way. Remember, it’s the combination of these two strategies that will propel you forward on your journey to financial freedom.

“In the next Part of this miniseries, we’ll go through Dealing with Creditors and Negotiating Debt”

Remember, being in debt is not a life sentence. By gaining awareness and taking the first steps toward managing your debt, you’re already on the path to financial recovery. It takes time, but with the right mindset and strategies, you can break free from the burden of debt.

For more personalized support on your debt-free journey, check out our wealth coaching services. You can also book a consultation to discuss your specific situation and start creating a tailored plan to get out of debt.