Use These 3 Simple Categories to Manage Expenses

Jake - Author/Founder

Jake - Author/Founder

I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

Key Takeaways

  • Most non-essential expenses are environmental, habit based, or material in nature.
  • Environmental expenses are the most powerful to identify and change. One decision point will  automatically reduce multiple future recurring expenses without any additional effort or discipline.
  • Habits are difficult to change and are best altered with habit replacement. Progress on the habit replacement should be monitored and assessed for 2 months. Focus on one habit at a time.
  •  Luxury material items lose value quickly and generally do not provide happiness or fulfillment. Reduce expenses in this category by identifying the material items that add true value to your life, and find true sources of fulfillment.  



The aim of this article is to help simplify your approach to expense management, allowing you to boost savings to pay down debt, build an emergency fund or invest.  

Remember, expenses are like weeds: they will naturally grow to match (or exceed) your income if you don’t keep them under control.  

You can use these savings to invest in wealth-generating assets to achieve freedom for you and your family in the future. Increasing income is a viable option to increase savings as well, check out this article for guidance on how to allocate your efforts between expense reduction and income growth. 

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Most non-essential expenses can be categorized as habitual, environmental, or material in nature. So how does this simplify things? 

Well, all expenses within a given category will have a similar management approach, allowing you to apply the same methodology to all expenses within that category

Environmental expenses are managed by changing your environment, and habitual expenses require you to generate replacement habits.

Finally, material related expenses require a psychological approach. Management of material expenses ultimately requires us to identify items that provide true value and to re-assess our sources of fulfillment. 

This expense audit tool helps you categorize expenses to identify what categories require the most effort. You can’t reduce expenses if you don’t first understand where your money is going. So,  the first step is to audit your expense. Find more about expense auditing in this article.

1. Environmental Expenses 

Environmental factors are seemingly fixed aspects of our external surroundings that drive recurring future expenses. These expenses are normally large. Examples include our house, our vehicle, and the people we associate with.  

Environmental expenses are the most effective to get under control – this approach is working smart, not hard at its finest.

We must focus on controlling our environment for this expense category. In doing so, one decision point can alter a future stream of expenses. 


Environmental Expenses, The Smartest Way to Approach Expense Reduction

Don’t focus on cutting back on lattes until these large environmental expenses are in check. I can’t overstate the importance of making careful decisions in these areas. Careful assessment will save you thousands of dollars per year that can be invested to grow true wealth. 

The good news is that you have the power to change your environment. 

An understanding of this concept is a powerful personal finance tool. The use of this tool now allows us to change a stream of repetitive future cashflows with one (generally large) decision. 

The singular decision point makes focus on environmental expenses a good use of our limited willpower.

Cookies in your house provide a good analogy – suppose you are trying to cut back on cookies. You can choose not to have cookies in the house, or you can buy cookies, keep them in the cupboard, and use willpower to avoid eating them. 

What is easier on your willpower reserves? Keeping the house free of cookies is easier as it puts up a barrier to get the cookies. Controlling your environment makes efficient use of limited willpower reserves. 

Environmental expenses are best described using examples.

Environmental Expense Example 1

Your home’s price, size, and location are environmental factors that direct a stream of future expenses (negative cash flows). 

The price and size of your home dictate the following expenses: mortgage payments/interest, home insurance, furniture to populate the house, property tax, utilities, and home maintenance. 

Your valuable time spent cleaning the house should also be viewed as an expense driven by home size. 


Home Expense Factors: Size, Location and Price

Finally, home location determines your time spent driving too and from work, fuel costs and vehicle maintenance costs.  

The singular decision to select a home determines all of these expenses for years to come. Make that single decision wisely.

Environmental Expense Example 2

I once had a fast hobby car in addition to my primary vehicle. I sold this car and my environment changed – all expenses associated with the car immediately disappeared: the 94 Octane gas, insurance, performance parts, synthetic oil, expensive tires, and annual registration fees. 

Unlike changing a habit, all it took was one singular hard decision to sell the car. All associated future expenses related to the car went away automatically without any additional effort.

2. Habit Based Expenses

What are Habit Based Expenses?

Habit based expenses are those that arise due to our habits.

A large portion of non-essential expenses are based on habits that have developed over time. Habits are deeply engrained and place our brains on autopilot when conducting the activity, such as stopping at McDonald’s every day after work or going to the mall every Saturday. 

We are often blinded by seemingly insignificant daily or weekly costs resulting from our habits. However, once we see the total expense per month, or per year, the habit may suddenly be viewed as a noticeable problem. 

The opportunity cost of these small habits can be huge. We are missing out on the “opportunity” to grow future wealth by making these small expenditures today. 

Opportunity Cost of Small Changes Assuming 10% CAGR

For example, a $12 lunch each workday seems minor, but this is $240 per month or $2,160 per year. Now consider the $2 daily coffee, $15 daily parking, $5 beer after work or $100 shopping every weekend, and we can quickly see how habit-based expenses can balloon out of control and limit our ability to save.

How to Approach Habit Based Expenses?

Habits are difficult hard to change. The difficulty depends on the total number of times the action has been repeated. Habit strength can further be broken down into the length the habit has existed and how frequently the habit has been exercised. 

Research shows the best approach is to replace the poor habit with a better habit. Replacement is easier than trying to eliminate a bad habit in a vacuum. 

Good habits are a superpower. A habit can make even hard tasks almost automatic and effortless after enough repetition. 

It takes discipline to change a habit, consistently applied over two months or so. The amount of discipline needed declines to nearly zero after the habit is engrained. 


Habit Replacement to Alter Bad Financial Habits

Think of habit replacement as an investment: once the habit is replaced, the new habit offers free Return on Investment (ROI) for life. It takes roughly 60 days to change a habit.

Keep track of your progress once a week until the two-month mark and then monthly thereafter. There are plenty of apps that can be used to track bad habits and replace them with better habits. This is great, but keep in mind that the repetitive use of the app itself requires a new habit to be formed!

Be patient, it takes time. Focus on one habit at a time.  You may give up if you set expectations that are too high. Remember giving up is the only true form of failure! You don’t want to revert back to the original habits.

Habit Based Expense Example 1

Kara seeks to increase savings by $200/month through expense cutting. Kara enjoys getting lunch at the local bakery with a friend every workday, at a cost of $12/meal, or $240/month. 

She decided that she would prepare meals at home on Sunday and Wednesday nights and would no longer eat at the bakery for lunch. Kara eats her packed meal at the park to replace the daily habit of eating lunch at the bakery. 

The new price per meal is $3, so Kara saves $180 per month. Kara has established two new habits after 2 months of making meals from home: Meal preparation and visiting the park at lunchtime.

Habit Based Expense Example 2

 I used to scroll on Instagram whenever I was waiting in line, normally at grocery stores. I decided to replace this habit by opening the Google Books App instead of Instagram. 

For the first month I had to consciously put in the effort to keep myself in check for the first month; “Hey, you opened Instagram, and you are in line at a grocery store, dude!”. After a while I found myself automatically reading while in line at the grocery store, with no extra effort or discipline required. 

3. Material Expenses

Material expenses can be classified as essential or non-essential. Essential material goods provide necessary functional value such as shelter, clothing, transport, food, and a cellphone. Non-essential material goods are luxury items that provide limited additional functional value, are primarily used to communicate material wealth to others. 

For example, a Ferrari communicates wealth to others, but it gets you to work the same as a Honda, so it shares the same functional characteristics. 

Terms like “materialistic” and even “material goods” can have a somewhat derogatory flavor. This is certainly not the intent here. I acknowledge that non-essential material items are used to communicate status. But, you need to actually be wealthy. It makes no sense to have fake status symbols purchased on debt when reality is that your net worth is in the negative (worse than a baby born yesterday).

 Luxury material items are only a problem if they are causing financial stress or getting in the way of your wealth building goals. 

 We can further sub-divide our non-essential expenses into items that add true value and those that do not add value. 

Non-Essential Expenses: Do They Add Value?

Ask yourself, does this item add true value to my life and bring me joy? If yes, consider budgeting for the good provided that you can afford it and understand the opportunity cost. 

Material items that add true value normally support our hobbies and are uniquely personal. For me, I love cycling, and spend 100+ hours on my bike every year. Therefore, I spend decent money on nice bikes, and I’m okay with sacrificing some future wealth for the present joy I receive from my bikes. 

However, most non-essential material items do not contribute to happiness or wellbeing. Does a $400 Dyson vacuum truly bring more value to your life than a $200 vacuum? It might if you an avid vacuum collector, but the answer will likely be a hard no for most of us.  

The short-term dopamine spike when purchasing “stuff” makes us feel fulfilled and happy in the present. However, this spike fades quickly, our threshold for luxury raises, and we are left in the same psychological place we were before the purchase. 

This is not a solution to long term satisfaction. Furthermore, we tend to get used to our new lifestyle and will have an urge to buy something better. This cycle can carry on infinitely, leaving us broke and unhappy. 

Note how this cycle is termed “lifestyle creep” and has phycological characteristics that parallel addiction. Finally, it is worth noting that luxury material goods such as cars, electronics, and clothing lose value rapidly – see my article on vehicle depreciation.

How to Reduce Material Expenses?

Cutting non-essential material expenses requires a psychological mindset shift. We must stop caring what others think and understand that true fulfillment does come from non-essential material items. 

Maslow’s Hierarchy of Needs helps us understand where true fulfillment stems from. 

Maslow's Hierarchy of Needs

Material goods might apply slightly to esteem needs of status and recognition, however, these needs can be met elsewhere.

Seek out fulfillment from hobbies, finding a job that you love, or start helping others. We can also seek to improve status through promotions at work or gaining respect from others through integral behavior.

It is powerful, and sometimes painful to realize that that very few people care what we drive, what phone we have or how large our house is.

 If people are drawn to us because of these luxury goods, then are probably in your life for the wrong reason to begin with. Once this mindset is changed, you are set to grow real wealth through an abundance of savings that can grow through investment.

Remember, we are looking to reduce our non-essential material expenses so that we can grow real wealth. The goal is to be wealthy, not look wealthy. 

We can buy luxury items once cashflow generating assets (Stocks, Real-Estate, Bonds) provide enough cashflow to pay for these goods. Otherwise we limit our real wealth – the thing that matters. 

Material Expense: Example 1

Bob normally buys the newest iPhone every year on a two-year contract. The price of each phone is captured over the 24 monthly payments; therefore, Bob is paying roughly $500/yr extra for the phone alone. By taking the hit on a lower-end phone with the same functionality Bob saves $500/yr.

Material Expenses: Example 2

George leases a new BMW 3 Series for $530 per month ($6,360/yr). George decides to target this expenses to meet his monthly savings goals. Upon expiration of the current lease, George decides to purchase a one-year old Honda Civic for $14,000 and drives it for 9 more years, saving George $43,340 over a 9 year period. 

George invests his savings, and receives annual dividend income for the rest of his life. The dividends are taxed far less than his employment income. George is able to buy luxury items later in life with his dividend income. 

3 thoughts on “Use These 3 Simple Categories to Manage Expenses”

  1. Hey Jake,
    Enjoyed reading our well written articles on expense and wealth management. I’m quite sure that you’re already well on your way to accumulating a sizeable chunk of wealth yourself. Well done and hats off to you. Your brothers and your mom must be very proud of you and are probably following your advice and lead. I’m impressed and wish you all the best.
    Cheers, Wolfgang

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