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Treat Your Budget Like A Corporate Balance Sheet To Create Bigger Returns


Treat your budget like you expect companies to threat their balance sheets.

Find areas to unlock additional value without impacting your lifestyle.

Invest for the long haul and create an income flow with your savings.

In the Q2 Earnings call for Chevron (NYSE:CVX), a comment was made by Pat Yarrington, the Chief Financial Officer, in which she stated, "We're also aggressively pursuing savings through the supply chain, particularly in the U.S., where our supplier responsiveness has been high. We have negotiated an excess of $1 billion in immediate savings, achieving product category reductions of typically 15% to 30%."

I don't want to harp on current issues in the oil sector, rather I want to highlight the underlying sentiment in her comments and create a model that we should all strive to emulate. We all expect the companies we invest in to be lean, efficient, money making machines in the best of times and (ideally) in the worst of times. This ensures that additional value is unlocked for us - the shareholders. Knowing this, why do we find it so hard to apply this same thinking to basic expenses we make everyday - and treat our personal budgets to the same scrutiny a company looking to cut expenses does. Can we find fat to trim and unlock additional value for ourselves by investing the savings?

When I first asked myself the question of could I cut anything from my budget, the obvious answer was of course yes - if I wanted to change my lifestyle. Since I do not think it is practical, nor do I want, to change my lifestyle in an effort to save a few bucks I revamped the question to focus on how I could trim fat without impacting my lifestyle in any meaningful manner - and I immediately found three areas in which this could be done.

I ran an experiment based on some recent personal experiences and cuts that I have made in my own personal budget. I found that had these savings been in place over the previous five year period, I could have turned these savings into a portfolio that paid me $350 a year and rapidly growing - simply by picking big, stable companies that operate in the areas I found these cuts.

Mortgage Refinance:
With rates near historic lows I decided to refinance the loan on my house. Truth be told I did this mostly to save on the long term interest costs (we only purchased the home in 2012), but I was able to pay $2,000 to reduce my mortgage rate from a fixed 4.00% to a fixed 3.625% rate and lower my monthly payment from $1,654 to $1,577 a month - a reduction of $77 a month. This gives me a breakeven point after 26 months, but will save me over $25,000 in payments over the life of the loan - not counting any interest savings.

Negotiating for a better cable and internet price:
I currently use AT&T (NYSE:T) for both cable and internet and was paying $225 a month for the service. As I did not really want to change providers, I called customer service and told them that their price was simply too expensive, I wanted to remain their customer, but at the end of the day I was simply no longer willing to pay $225 a month as there are plenty of other competitors to choose from. After some back and forth my bill has been lowered to $155 (including taxes) a month for the exact same service. This earned me a savings of $70 a month.

Electricity Savings:
I live in Texas in an area that has deregulated their electric service, and consumers are able to price shop and get different rates on their kilowatt hour price. I had no issue with the company I had been using, and I was paying $0.11 per kilowatt hour. After researching alternative plans, I was able to reduce this to $0.07 per kilowatt hour. Looking at the amount used each month for the previous year and calculating the average I found I generally would use 1,500 kilowatt hours a month. This means my average electric bill (it would vary by month of course) was reduced by $60 a month.

So, simply "renegotiating" with the suppliers (places I do business) for the benefit of the shareholders (myself) has unlocked $130 in extra money each month, and $207 a month after the mortgage breaks even, that I can use to add additional value for myself.

To highlight the potential impact these savings can have I will examine what the outcome would be had I simply invested those funds yearly into big names in the categories in which I saved the money - and look at how they performed over the last five years. I will use JP Morgan (NYSE:JPM), AT&T , and Consolidated Edison (NYSE:ED). I will use January 2011 as a starting point and January 2015 as the final purchase and will assume no dividend reinvestment. This particular time frame is not overly relevant, as my focus is income and my time frame is over 20 years, the bottom line is just to highlight the impact small amounts of savings can produce over time.





















































**Note for JPM it takes 26 months to get back to breakeven on the refinance, so no purchases would be made until funds accrue in January of year four.

This example shows that treating my personal budget like a company looking to unlock additional value yields clear results. After five years (pursuing cuts that had no impact on my lifestyle) we have created a portfolio worth almost $8,000 and an income stream that pays $350 a year (and over $800 in total dividends that were not reinvested) and is rapidly growing. Certainly in practice some issues might arise, such as the cost of power increases, or you are only able to get a smaller reduction on your cable bill - and that would impact your numbers.

However, the bottom line is simple - we expect the companies we invest in to unlock additional value for its shareholders, and we should also expect the same from our own budgets. Where can you find extra value in your budget?

Disclosure: I am/we are long T, CVX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I will possibly purchase shares of JPM and ED at some point this year.