*This is Part I of a two-part series on increasing your savings rate. This part addresses lower-end purchases. Part II focuses on the big-ticket items.*
It’s easy to think that your smaller purchases don’t have a big impact on your bank account. Those daily purchases in the $5-15 range and monthly purchases in the $100-200 range can’t add up to much. Or can they?
In reality, it all adds up over time. After all, $10 a day equals $3,650 a year. Funnel that extra money into your retirement accounts and you’ll be much better off in the long run.
Is it really possible to save an extra few thousand dollars per year before touching your housing and car payments?
For many, the answer is yes. And if you haven’t lived on a budget in the past, the answer is even more likely to be yes.
You may be thinking:
“Isn’t increasing my savings rate exhausting? I don’t want to analyze every purchase I make throughout each day.”
You shudder at the thought of all the daily stress… Should I buy that latte or not? Should I go to Panera or Subway for lunch?
Countless personal finance blogs urge their followers to scrutinize every purchase to get on a path to financial freedom. But predictably, many of them become overwhelmed and completely abandon their budgets.
In this article, you’ll get sustainable strategies. I’m a big believer in the 80/20 rule and you’ll quickly see how a concentrated effort can dramatically improve your financial picture… Without agonizing over every dollar.
So, let’s start talking about where your money is going and what you should be paying attention to.
Alright, so maybe it seemed like I was going to ignore the daily lattes and lunches.
Your daily decisions are very low-hanging fruit that make a huge difference in the long-run. Let’s say you go to work 230 days a year. That’s 230 days where you’re going to encounter a lot of the same financial decisions. If you’re a creature of habit, to any extent, you’re making hundreds of financial decisions on autopilot. The same things day after day.
You should evaluate these financial habits. But only change or cut them if it won’t negatively impact your life.
If you really enjoy having a coffee at the local shop each day, then by all means keep doing it. But if you’re just taking a coffee to-go every day, and you honestly don’t notice much difference between it and the office coffee, understand that you could be looking at savings of close to $1,000 per year by implementing one small tweak to your day.
Same thing with your daily lunches. Maybe you’re spending $12 a day to eat out at work. For some people, it would be best to continue doing that. For others – perhaps those that don’t mind meal prepping – they might be able to save $1,200-1,500 a year by bringing their lunch from home.
Those sneaky old things.
Subscriptions are amazing… For the subscription business. Netflix and Spotify have built empires off of them. You sign up for $10 or $15 a month and it seems harmless. But multiply that by 12 and it’s not so harmless.
And we’re not even factoring in some of the biggies – your cable bill and gym membership.
All in, many people are spending a few thousand dollars a year on subscriptions.
As with the lattes and lunches, if you’re getting a lot of value out of your subscriptions, keep them. But subscription businesses are successful because so many of the customers “set it and forget it.” You’re likely not using some of your subscriptions. Or not using all of the features.
Doing a full evaluation of your subscriptions every 3-6 months is a good way to start. Maybe you could downgrade your cable plan or cut the cord. Maybe you realize you would be just as happy at the $20 a month gym as at the $80 a month gym. Maybe you barely listen to music and you realize that playing a few songs on YouTube is a viable alternative to Spotify.
The focus so far has been on your routine. One-time or occasional evaluations of your daily and monthly spending can yield several thousands in savings per year.
But what about the things you do once every few months or even once a year?
It’s probably not worth agonizing over $20 during a twice-a-year dinner with your old college friends.
But let’s say you’re going to eight baseball games per year and spending $200 each time on the ticket. You’d potentially be looking at a minimum of $1,600 per year in savings. That number would likely be significantly higher when you factor in parking costs and (overpriced) food and drinks. Even just going to four games instead of eight per year would likely save you close to $1,000 a year, all things considered.
It’s Sometimes Best to Pay a Premium
A few years ago, I spent $250 on a pair of dress shoes. I could have purchased a decent pair for $100.
You might be thinking, “this guy must have started being financially responsible sometime after that.”
Not exactly… Let me explain:
I know a bit about dress shoes. And I knew that the $100 pair would wear out in a year or two, and I wouldn’t be able to repair and refinish them. On the other hand, the $250 pair would last around twice as long without requiring much maintenance. And then after two to four years, I could send them back to the company. For $100, the shoes would quickly be returned to me, resoled and refinished. Pretty much as good as new.
Oh yeah, and the $250 shoes look much better than the $100 pair.
The takeaway here is that more expensive is sometimes more budget-friendly. You can apply similar logic to countless other items – backpacks, cookware, jeans, etc.
The key is to avoid falling for the luxury brand hype. Only buy something if it’s a legitimately better option. My $250 shoes were actually cheap relative to the other high-quality options. I could have easily spent close to $1,000, but at that point, I would just be paying for the brand and a marginally better looking style.
You need to find the sweet spot.
Putting It All Together
Saving more is a lot like getting into good physical shape. There’s going to be some sacrifice and trade-offs, but you don’t need to take a drastic approach to see fantastic results.
Of course, if you do take a more aggressive approach, it will offer a better pay-off.
Doing something is better than doing nothing. And your future self will be very thankful if you start taking action on your budget today.