Be Careful What You Cut

Find out what costs you can cut - and which would be risky to get rid of!

This article was first sent to Fools as part of our '`Cracking The Credit Crunch' email. This time, we  look at popular ways to cut costs -- and show you why some of them might be risky!

The Credit Crunch is no longer just hitting hedge fund managers. The proverbial `man in the street' is making changes. According to recent research from AXA, 72% of households with a total income of £30,000 or more plan to cut their spending this year.

So far, so good -- but a worrying one in five said that they planned either to cut their pension contributions or stop saving entirely until financial pressure eases.

While there are many ways in which people plan to be prudent this year, some of them are safer than others.

So, I'm going to run through several of the most popular targets for cut-backs ... And explain why some of them ought to have a health warning attached.

Cuts That Could Cost You

1.  Regular Savings

When money becomes tight, regular contributions to a savings account might be among the first potential victims of the squeeze.

But it's worth remembering that, when living in troubled times, it's more important than ever to have a cash cushion you can fall on in emergencies.

Fool.co.uk has often suggested that amassing an `emergency fund' equal to around 3 months' salary payments is an important goal. This should be enough to help you cope with sudden job losses and/or unforeseen expenses.

If you already have a rainy day fund, then perhaps you could cut contributions to your savings account. If you don't have much of a savings cushion, I'd urge to try and carry on saving if you possibly can, even if you reduce the sum you put by each month. At least until you've hit that magic `emergency' number.

2.  Life Insurance

Many people take out life insurance when they first set foot on the property ladder so that, in the event of their death, their mortgage would be repaid.

If you have a partner, children or other dependents who would struggle to survive without your income, then your life insurance policy serves a clear purpose -- and cancelling it could be a big risk.

However, if your income isn't providing for anyone except you, life insurance may be an unnecessary expense.

If that's the case, you might want to think about replacing your life insurance with competitive critical illness cover (which usually includes life cover anyway), or even income protection cover so that you aren't completely without a safety net.

3.  Pension Contributions

Right now, it probably seems that the percentage of your salary deducted at source each month would be more useful winging its way to your bank account.

However, halting contributions to your pension now, even if you make them up later, could have a dramatic impact on your retirement fund.

Because of the way compound interest works, your pension will be worth more the earlier you start saving. A break now in payments of £100 per month could cost you thousands years down the line.

When it comes to cutting pension contributions, you need to weigh the short-term benefits against the possible long-term costs.

Also, it's worth remembering that paying into your pension attracts valuable tax relief which you will lose if you stop saving.

4.  Holidays

According to research by Fool.co.uk, almost half of us are planning to go away less this year or choose cheaper destinations. But what if you've already booked your holiday for 2008?

It might be possible to cancel, depending on how much you've paid and how soon you're due to travel. And if you know you'll be unable to pull together spending or accommodation money, for example, it might be wiser to forgo the trip than borrow money to pay for it.

However, you're likely to be charged for pulling out of your holiday, so find out what penalties you could face if you decide to do so.

Get all the information you can, then decide what's best for you.

Cuts We Can All Make

Slowing spending on shopping and going out is still the most obvious, risk-free way to cut costs.

Although slimming down your social budget can be painful, it doesn't have to mean you enter a state of hibernation.

Planning your spending more effectively can make a difference, and there are lots of ways to eat out for less. Websites such as Toptable.com can offer great discounts on restaurant meals.

When it comes to expenses like mortgage payments, utilities bills and car insurance, using comparison services is a great way to reduce your bills.

If you're repaying debts, now is also a good time to make sure you're doing so as cheaply as possible. Why not compare 0% and life of balance transfer credit cards to see if you can cut the cost of your borrowing?

Other `everyday' expenses, such as gym memberships, posh coffees and cigarettes are all a matter for the individual - but re-thinking your spending on these things could save you hundreds of pounds per year.

Overall, it seems that there are only a few ways we can really cut costs without cutting corners. And (rather annoyingly) these often involve making sacrifices in the here and now.

However, being careful with your budget and feeling frugal for a while is probably the best way to safeguard your financial future.

I know I'll comfort myself with that when I'm mourning my daily skinny latte. 

If you're looking to reduce the cost of everyday bills, why not visit The Motley Fool's comparison centres to find cheaper deals on energy, insurance and mortgages?

The comments above are the opinions of the author only and do not represent advice specific to your circumstances.

Section 2 under `Cuts that could cost you' has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.

The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered office: Pinnacle House, A1 Barnet Way, Borehamwood, Hertfordshire WD6 2XX.