2013 is right around the corner, and coming with it is the looming threat of the Fiscal Cliff. Essentially, if nothing changes between now and then, we'll all wake up on Jan. 1 with higher tax rates and lower government spending levels. If your income is either dependent on government spending or provides the tax payments that fuel that spending, you'll likely have less cash to spend, beginning with your first check in January.
With that deadline fast approaching, the next few weeks are a good time to figure out where and how to effectively cut back your spending so that you can make the most of what you'll have left.
Where does your money go?
The first step to cutting back your costs is to understand where your money goes. It's a lot easier to cut your costs when you know what the biggest drains on your cash are. Then you can make plans to address those specific spending areas.
If you use personal finance software like Quicken, built-in reports will let you know where your cash is going. Alternatively, if you run all your spending through a credit card, that card's website might have spending graphs that you can use to see where your money winds up.
Everyone's situation is different, but depending on your circumstances, your report might wind up looking a bit like this:
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Each of these expenses can be adjusted to some extent. It's just a question of whether the benefits are worth the cost and effort to make the changes.
How to reduce those big-cost items
Taxes: The easiest way to pay lower taxes is to earn less income that gets subject to taxation. That doesn't necessarily mean you need to accept a pay cut, but rather that high taxes should encourage you to look for ways to reduce the tax impact of your earnings.
One of the easiest ways for ordinary wage earners to shelter income from taxes is to contribute to a traditional 401(k) plan. In 2013, most employees will be able to contribute up to $17,500 in their 401(k)s, with those ages 50 and up able to add $5,500 more.
Groceries: If your grocery trip includes prepackaged or other forms of convenience foods, you can save a bundle by buying the raw ingredients from the store and assembling and cooking your meals. Even simple steps like shopping with a list -- and sticking to it -- or setting a specific weekly food budget can result in significant cost-cutting.
Mortgage Interest: Mortgage rates are near all-time lows. If you've got a mortgage and are able to refinance it, taking advantage of today's incredibly low rates can potentially knock thousands of dollars off your annual interest payment.
Household (maintenance): Of all the big spending buckets (other than medical), this probably has the biggest variability and the biggest "surprise" element. Appliances wear out, basements leak, and roofs need repairing. Don't put off regular maintenance. Spending a small amount up front to fix small problems saves you from shelling out big dollars for big-ticket fixes. Another way to control the costs of maintenance is to regularly set aside money to cover the costs of repairs. Cash both improves your bargaining power with vendors and keeps you from having to pay interest expenses on top of the costs of whatever needed repairing.
Auto: Consider carpooling, telecommuting, and/or using mass transit instead of driving alone, whenever possible. That not only can save you direct commuting costs like gas, parking, and tolls, but it can also help reduce the wear and tear on your car, which saves you on maintenance and repairs.
Insurance: By shopping around every time your insurance policies are up for renewal, you can guarantee that you're getting the best rates. In addition, consider taking higher deductibles and saving the premium differences versus what you were charged on the old deductible, in case you ever do need to use the insurance. Generally speaking, you'll recoup the increased deductible within a few years of premium savings and be ahead money-wise if you ever do need to use it.
Utilities: Energy and water efficiency is the name of the game here. Low-flow toilets, showers, and sinks can keep your water bills down, and good insulation, compact florescent lighting, and a programmable thermostat can keep the electric and gas bills in check.
Education: Public schools often have fee waivers for those who truly can't afford an otherwise mandatory charge. And remember, there's no shame in passing on the myriad of fundraisers that schools have, especially if you're forced to choose between the fundraiser and your electric bill.
Charity: Charity is a completely voluntary expense. If you can't afford to give as much next year but still want to contribute to your favorite causes, ask what volunteer opportunities are available. Plenty of solid charities would benefit greatly from a donation of your time and talent.
Medical: The key levers you have as far as saving on medical expenses are things like asking for generic prescriptions, making sure you only see in-network physicians, and making use of lower-cost options like in-store clinics for basic care needs.
As bleak as the 2013 fiscal cliff may seem, remember that you probably have some sort of wiggle room in every major expense category you have. By planning now, you can make the right choices for you and your family that will enable you to best cope with whatever financially comes your way next month.
Chuck Saletta is a contributing writer to The Motley Fool.