As we discussed in this article, there are multiple steps that you will need to take as you move towards complete financial independence. Savings play a key role in each step since it directly impacts your investment capacity defined as the gap between your income and your spending.
Increasing income typically takes more effort and time, while gains from optimized spending are immediate.
Saving an extra $100 a month would equate to an annual salary increase of $2,000 since savings come from after-tax dollars. Hopefully you will be able to save much more than that with the tips that I am sharing below. I won’t be talking about cutting your daily latte, I will only focus on major needle movers.
Before we dive in the details, I want you to see this as an optimizing exercise, not just cutting back from your lifestyle. As you will see, some ideas below will actually increase the value that you get while decreasing the cost.
As we go through the ideas, I will not only provide the estimated monthly savings amount for each, but also present how much that saving will be worth in 25 years (an arbitrarily picked time frame) when invested to help you see the impact of each decision. You should always be thinking saving and investing as an inseparable couple.
A quick and dirty way to estimate the 25-year compound value of a recurring monthly expense is to multiply the monthly amount by 1,000. For example, if you save and invest an extra $100 a month, it would become $100,000 in 25 years!
Ok let’s start with the low hanging fruits that are easy to implement without a major disruption in your life.
1) Cut the cable service.
Cable service costs around $100 a month. If you really need to watch things to unwind, get a Netflix ($9/month) or Hulu ($6/month) subscription so that you will not only save money but also be more conscious about what you watch and how much time you spend in front of the TV.
Net Savings: ~$90 month
25-year compound value: ~$90,000
2) Change your phone plan.
I used to have an AT&T cell phone plan where I was paying over $100 a month. Every time I traveled abroad, I would whether buy their international plan for an extra of $10 a day or get a local sim card for a little cheaper. I switched to Google Fi and I am not only paying way less but also have access to their international data plan without any extra charge. This basically means using data overseas are treated exactly the same as using data in the US. My monthly bill now is around $40.
Net Savings: ~$60 month
25-year compound value: ~$60,000
3) Shop for your car insurance.
This is not a fun exercise, but it’s totally worth it since it is a sizable recurring expense. Spare a few hours every 6 to 12 months and call all insurance companies to get quotes. You will be surprised how much the prices vary from company to a company. In different years, I got the best (and the worst) quotes from Geico, Allstate, State Farm and Metromile. You have to call all well-known companies to find the best offer. While your savings will depend on the offer, it is not uncommon to save over $50 a month.
Net Savings: ~$50 month
25-year compound value: ~$50,000
4) Eat and drink out less.
Eating and drinking out is fun and we are not machines. We enjoy human interaction and socializing outside feels great. I am not in a place to suggest completely cutting your restaurant budget or stop grabbing drinks with friends. But just remember that, every time you eat out, it costs 5-6 times more compared to eating at home. A rough estimate for a typical home-cooked meal would cost around $3-5 while if you eat at a restaurant, you are probably looking at $15-$20.
Although they are typically under the radar, drinks can make as much impact as food in many cases. Cost difference of having just one drink outside vs home can easily get to over $10.
Just two meals and two drinks a week at home instead of outside will unlock savings of over $200 a month!
Chances are you can save much more than that depending on how much you are currently spending on restaurants and bars.
Net Savings: ~$200 month
25-year compound value: ~$200,000
These ideas so far are easy to implement without much disruption in your lifestyle. Now let’s discuss two most impactful needle movers that will save you a lot of money but come with major potential changes in your lifestyle:
5) Do something about your car.
Cost of having a car adds up quite fast. Car payments, maintenance, repairs, insurance, gas etc. On top of this, 99% of the cars are depreciating things (not assets!), their value only decreases in time. Therefore, whatever your case is, the first thing to check is if you can live without having a car. Can you take the public transportation to where you regularly go and rent a car when you want to have a weekend getaway once in a while? Can you bike instead of driving?
If you can’t imagine a life without a car, buying a used car and paying fully in cash is the best way to go.
So how can you create savings if you have a car? Here are two scenarios:
- If your car is fully paid off, good for you. Since you already paid off your car, your further potential savings will probably be a bit limited. If your car is problematic or expensive to maintain, you may want to compare it to a reliable make/model and see how much you can save. I used to have a bad apple that needed to go in a shop every month, I had to pay hundreds of dollars each time to the mechanic. I finally sold it which saved me hundreds every month.
- If you have a car loan or you’re making lease payments, this gives me a little stomach ache since the opportunity cost of not investing that amount is very significant (in addition to all other costs that comes with the car). For example, a single loan payment of $300 actually costs you over $2,000 in a 25-year period due to the opportunity cost of not investing that amount. Imagine how much all of your payments will cost you! Therefore, the best thing that you can do is to sell the car (or transfer the lease), and start investing the amount instead.
If this is not an option for you, try to pay off the loan as soon as possible so that you can do some level of damage control on the opportunity cost.
Net Savings: It will depend on your unique case. Let’s assume that you got rid of monthly car related expenses of $400 month.
25-year compound value: ~$400,000
6) Save on your housing costs.
This will probably lead to the biggest disruption in your life depending on what route you take. However, it also has the biggest potential financial impact.
A quick disclaimer: I am not a big fan of buying real estate, independent from whether you occupy it yourself or not. Buying real estate and using it as your primary residence in most cases is a subpar use of capital compared to investing in capital markets. Even if you buy it as an investor, it requires significant market and financial knowledge, it is hard to find cash flow positive assets since you are competing against experienced investors, it is a hyper-concentrated asset type and it typically requires some level of operational involvement. Of course, there are ways to build wealth through real estate, but that’s the topic of a different article.
Going back to the subject, the most common ways to create savings on housing costs include the follows:
- If you are a renter, you have great flexibility. You have couple of options when you are looking to decrease your rent expense:
If you want to live alone, move to a place with a lower rent by going from a 1-bedroom to a studio or changing your location/city if you can. A smaller place would also mean that you will need less stuff to fill it with.
Get a roommate. This not only decreases your rent expense but also cuts many housing related expenses in half (utilities, internet etc.)
- If you own the place, moving to a lower cost area (and potentially downsizing a bit) typically makes the biggest impact. Not only you will be able to invest the proceeds from the transaction, you will probably be saving a meaningful amount on all housing related costs.
Net Savings: It is hard to estimate since there are so many potential scenarios. For exercise purposes, let’s assume that you are able to decrease your housing related costs by $750 a month.
25-year compound value: ~$750,000!
If everything that we discussed above applied to you, what will be the 25-year value of all of savings above? Over 1.5 million dollars! So even if you implement just a few of the ideas above, numbers will add up rapidly thanks to the compounding effect on your investments.
Of course, there are many other places to find savings including traveling by making the best use of your points, canceling any subscriptions and memberships that you don’t absolutely need, optimizing your taxes etc. Just look at your detailed spending for the last 6 to 12 months, identify major items and see how you can optimize them going forward.
Remember, every $100/month that you save and invest equates into $100,000 in 25 years!