Life can throw you some unexpected curveballs when it comes for unforeseen costs and financial pitfalls. And even though I may not have to cut costs right now, I like to be ready nonetheless. This is where conducting cost-cutting drills – much like having a fire, tornado or earthquake drill – can help you develop a plan should such a financial emergency strike. Doing a cost-cutting drill can make it easier to enact expense reduction measures quickly and effectively in a real financial crisis.
Create a budget
The first step that really enables us to conduct a cost-cutting drill is to have a budget that lists all of our regular expenses. By creating and maintaining a budget, we begin to get a better feeling for what costs we incur on a regular basis and in what amounts.
Developing an accurate budget doesn’t typically just happen overnight though. However, by tracking expenses for a multi-month period, we can begin to develop a sense for how, when and where costs occur. This step can make conducting a cost-cutting drill much simpler and more effective when the time comes.
Break out necessary versus discretionary costs
While cutting necessary costs such as food, utility, and housing costs might be possible, and even probable, when it comes to a cost-cutting drill, greater expense-reduction options may be found in discretionary costs.
Phone, internet and cable costs, transportation costs, dining out and entertainment expenses, and similar items might be slashed for greater savings and with less effort in a cash crunch.
Conduct a drill to find out how much can be cut
Once all costs are laid out and broken down between what can and can’t easily be cut, then a true cost-cutting drill can be conducted. It’s important to remember too, cuts don’t have to be an “all or nothing” proposition. Cutting 5 percent here or 10 percent there can be just as effective – sometimes more so – than cutting certain costs completely.
For example, reducing a $300 utility bill by 10 percent a month will save more than cutting out that $5 weekly gourmet coffee you’re buying once a week (not to say that the gourmet coffee shouldn’t go too in an financial emergency).
Going through your list of expenses and putting realistic cost-cutting estimates to them can not only be a good drill to prepare for an emergency, but it could help cut costs in the near term by pinpointing areas of excess or places that could be cut, emergency or not.
More From This Contributor:
Building a Revenue Producing Blog
I Won’t Be Waiting to Take Social Security
Preparing to Publish My First E-book
The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.