A lot of people set resolutions to save more money. In fact, it was the third most popular resolution for 2015, behind only “lose weight” and “get organized.” But as we’ve noted before, only 8% of people successfully achieved their resolutions. So how do we go about making sure that we are the select few who actually do save more money?
Do you focus on the Latte Factor and cut out your daily coffee? Do you drive around in search of the best deals or spend your Sundays clipping coupons?
I would argue that if you want to save the most money, you need to first look at the areas where you spend the most money.
American Spending Habits
In 2015, the average married couple without children dedicated 31.3% of their spending to housing, 16.6% to transportation, and 11.8% to food. The average married couple with children spent 31.2% on housing, 17.6% on transportation, and 13.1% on food.
Either way, these three categories make up about 60% of the average American family’s spending. If you’re looking for a place to save some money, I’d recommend starting here. It is much easier to cut spending where your spending is the highest than it is to try to squeeze savings out of smaller categories.
I would also add saving on your taxes on top of this. We pay a lot of money in taxes for the privilege of living in civilized society. This doesn’t show up in your spending because it is usually gone before you see it, but there are easy ways to cut down on your tax bill!
Let’s start with housing. Your rent or your mortgage is probably the single largest bill that you have every month. This also means that it has the potential for the biggest savings if you can find a way to cut that bill down.
Maybe you could consider downsizing. Do you have an office that is never used? Maybe a living room that is purely decorative? Maybe you have a ton of space dedicated to storing stuff that you never actually use.
A big savings win would be finding a way to move to a smaller and cheaper place. (And all the better if you sell off some of that unused stuff that was taking up extra space. You could also donate it and use the deduction to save on taxes while doing some good for others). Cutting your bill by $500 per month would save you $180,000 over the course of a 30-year mortgage. That’s a lot of lattes.
(Plus, if you invest that money in a stock market index fund, you’re looking at closer to $750,000, assuming an 8% interest rate.)
Along similar lines, you could consider moving to a new neighborhood. The cost of housing varies greatly based on location. Maybe there is a house or apartment that suits your needs just as well in a cheaper neighborhood. You could even find a place closer to work and save on transportation costs.
Are you in a place where it is much cheaper to rent than to buy, like Washington, D.C.? Then it may be worth considering selling your house while the market is hot and renting for a while. As I’ve noted before, deciding whether to buy or rent comes down to a lot more than just money, but it is at least worth giving it a little bit of thought.
There are other options that may be appropriate based upon your location and stage of life. Maybe it would make sense to bring in a roommate. If your work is location independent, maybe you could look into a lower cost-of-living area.
Some of these options won’t make sense for some people. Maybe none of these make sense for you. But make sure that you properly weigh your options before dismissing them out of hand. There is a massive amount of money to be saved here!
The second largest area of expenditure is transportation. And most of this is spent on cars. With car payments, gas, maintenance, and insurance, the dollar signs start stacking up quite quickly.
Here’s an easy one: if you are trying to save money, leasing is most likely a bad idea. There are a lot of conveniences that come along with leasing that you don’t get by buying, but it is rarely a cost-efficient option.
If you usually buy new cars, consider buying used. This won’t help with the gas costs and will tend to make the maintenance costs higher, but you can save a lot of money on the car payments and the insurance by buying used.
If you usually trade your car in for a new one every two or three years, then hold onto it for longer. The biggest drop in value occurs over the first three years of a car’s life, so if you are only keeping it for three years, then you are paying for its most expensive miles and missing out on the value that comes afterward. (This is another reason buying used often makes a lot of sense).
Could you cut down on car usage? Could you walk more? Ride a bicycle? Take public transit?
If your household has two cars, how often do they both need to be in use at the same time? Could you sell one of them and become a one-car household?
As referenced above, could you move closer to work and cut out the need for a car entirely? Or move closer to public transit to decrease your reliance on your car?
Again, these won’t work for everybody, but it is worth considering each of these and determining whether any of them are options that you could pursue.
Food costs are the smallest of the big three. There is less room for savings here, but still more than most other categories of spending.
If you are a frequenter of restaurants, you could save a lot by eating at home more. This can be especially big in cities and other high cost-of-living areas where the restaurants tend to charge a lot more.
Similarly, if you buy lunch at work, try bringing your lunch in instead. You could make yourself something the night before, bring leftovers, or, if you’re lucky enough to have an office, stock a mini fridge with lunch options. This is something that I have implemented myself to great effect. I still eat lunch out at least once per week, but I save over $1,000 per year over my previous lunch habits.
Taxes are often overlooked here because they don’t feel like spending. The money is gone before you see it and you don’t really have much of a choice in the matter. The government gets to take their cut first, right?
Well, yes, but there are things that you can do to keep that money for yourself. Or, more specifically, there are things that you can do to give that money to your future self instead of giving it to the government.
If you have access to a 401(k), a 457(b), or a 403(b), then put money in it. This is money that you are giving to your future self that you are allowed to defer taxes on. In 2017, you can put up to $18,000 in one of these accounts. Depending on your marginal tax rate, you could be deferring $4,500 next year (based on a 25% marginal tax rate).
In this same vein, if you don’t have an IRA, then open one now! You can put $5,500 into an IRA each year (as long as you meet the income qualifications) and you can still put money in for 2016 up until tax day.
Finally, if you have a high-deductible health insurance plan, you have access to a Health Savings Account, or HSA. The HSA is a massive tax benefit for anyone that has access to one. You don’t have to pay tax on the money as it goes in. You don’t have to pay tax on investment gains as the money grows. And you don’t have to pay tax on the money when it comes out if it is used for health expenses. This triple tax benefit could save you a lot of money.
If you are looking to save more money in 2017, these are the areas that I would suggest looking at first. These big spending categories represent huge potential savings for most families.
Have other thoughts for saving in these areas? Think there are other areas that are more worth our focus? Let us know in the comments!