My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 16, 2020

How do I reduce my fixed costs?

COVID-19 has been a revelation when it comes to tracking our costs. For many of us, it has provided absolute clarity on what are our true fixed costs are and how much we spend on discretionary items. I think many of us have been stunned at the level of discretionary savings we had when COVID hit initially and still have in large part. These discretionary savings came from four areas in general: entertainment, restaurants, clothing, and travel.

Many of my clients and friends have said they plan to temper some of their “excessive” pre-COVID discretionary spending in a post-COVID world (which hopefully arrives sooner than later). Whether or not we revert to our old discretionary spending habits once we feel safe will be an interesting experiment in human nature.

But how about our fixed costs? Is there anything we can do about them? Today, I review four of the larger fixed costs and discuss some considerations for reducing these fixed expenses.

Automobile Costs


Every year after News Year’s, I print a summary of my yearly spending, and every year I’m shocked once again by the money my family (and I’m including myself) spends on car-related expenses such as leases and financing, gas, and insurance. I always say to myself, I could replace my car for one half off the cost and would lose nothing except prestige (or in my case, possibly the loss of a convertible top) and maybe some unnecessary higher end performance.

Assuming ego and car performance are primary drivers of your choice of vehicle and you can overcome both these obstacles—can you reduce your fixed costs if your lease is not coming due or you are unable to sell your car due to financing constraints?

Cutting car costs


To be upfront on this, I am not a car expert or car nut, so you will have to do some homework on your own. But a couple people I know have moved off their previous cars and have shared their win-wire with me, so let us discuss some considerations.

Firstly, to make the savings worthwhile, as noted above, you need to park your ego, which means moving off your mid to higher end car for a less sexy model (i.e., you need to drop your lease a few hundred dollars). In most cases, dropping your mid to higher end car will also result in significantly lower fuel and insurance costs.

Here are a couple of ways to do this:
  1. There is a huge demand for used cars right now, so your first step may be to talk to your car dealer. While typically this will not work because the breakage fee will be too high (meaning, when they compare the buyout to the appraised value, it will be a large penalty that most people would not want to pay), I know that in at least one case, that is how someone moved off their car. Again, I am not a car expert, but there would be no downside to see if your dealer has any interest or if they could make it a win-win.
  2. The second and more likely way to move off your lease (it may be possible for financed cars, but I am going to deal here with leased cars) is to use a lease-breaking company. While you win by moving off your expensive lease, the person taking on the lease wins by lowering their lease costs as they benefit from your initial down payment on the lease or because you incentivize them to take over the lease. It may also allow them to lease the prestige car they desire at a lower price. There is substantial due diligence required for both parties. If you are moving off your lease, you need to understand the transaction, transfer fees, timing (so you do not get stuck with two final lease payments). If you are taking over the lease, you need to understand the lease terms you are assuming, the current wear and tear, the kilometres driven, and lease conditions related to the kilometres at the end of the lease.
As noted, I am not an expert in this area. I am just pointing out options to lower your auto costs, but you need to educate yourself of the pros and cons of taking over a lease, if that is of interest to you.

Mortgages


Mortgage costs are typically the largest fixed cost for most people. The main issue with refinancing is the penalty to break your mortgage (check your mortgage to confirm its terms). Penalties are dependent upon whether you have a fixed or variable mortgage and where you are in your mortgage term. Typically to break a mortgage you would pay some permutation of three months' interest, plus the associated legal costs (you may want your lawyer to assist you at the outset in understanding the legalities of your mortgage).

Whether it is worthwhile to refinance is a math exercise that is far beyond the scope of this post. There are many free calculators on the web that let you plug your current mortgage into a calculator to determine the savings under a refinancing. Very simplistically, you would then need to compare those savings to the penalty and legal costs.

As with a car lease, you need to be careful and undertake substantial due diligence and possibly get financial and legal assistance.

Insurance


Another large fixed cost is insurance. I have written before about reviewing your life insurance coverage, and while that post was intended to ensure you have the proper amount of life insurance, you should review all your policies (including other types of insurance, such as disability and critical illness) to confirm they are still required to meet your insurance needs.

Many people at some point in their lives were sold a policy of some sort that may have not been required or is duplicate or excessive coverage. If you have a trusted financial advisor, you can pass your coverage by them to get their opinion on whether you have any policies not really required to protect yourself.

Other costs (or, How many streaming subscriptions do you need?)


We all have multiple fixed plan costs, for phones, internet, music, TV and streaming services, and newspaper and magazine subscriptions. My suggestion is to note all these down, and see if any should just be eliminated because they’re unnecessary (do you really need cable, Netflix, Prime, and Apple TV? Do you need both Sirius and Spotify?). And if you still need or want them, see if you can negotiate the costs down.

The above list does not necessarily include all your fixed costs. However, the point of this post is that you may be able to reduce not only your discretionary costs but also some of your seemingly fixed costs. Feel free to spread the lesson throughout your financial affairs.


The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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