How to Save Half Your Income — If we can do it, you can too.
How is this possible? It takes a little effort to get to this point, but once you’re there, it is super simple to maintain. You too can save half your income. Just like any habit (good or bad), it takes time to establish it. But once it is established it becomes easy to continue doing.
My family went from saving barely 15% of our income four years ago to 50% this year. And our number of family members went up!
Before we go into the HOW we save half our income, let’s first talk about the why.
Maybe we’re insane.
The more we can save, the more we can invest. The more we invest, the more low tax passive income we can create. The more passive income we create, the sooner we will become financially independent — as in, we don’t need an employer. After that, we can reinvest in success and continue to grow our income stream.
Think about it this way. What does it take to get more money from your employer? You could work more hours if you are hourly. Or do what is required to get a raise. Maybe get a different job. You could even get an advanced degree and hope that increases your income more than the cost of the degree.
But what does this really accomplish? Small, unpredictable raises. Nothing you can fully control. You can’t count on a raise year after year. You can’t even count on having a job with 100% confidence.
The income stream we want to create doesn’t depend on an employer. We have control. It will be diversified and low risk. We will be able to cut the cord from a W-2 job any time we want (like if “work” becomes just that “work” instead of fun). We will reinvest part of our income stream so that it continues to grow:
We can continue to give ourselves a raise year after year!
We are NOT penny pinchers
Now you have this picture in your head of my small family working our asses off, coming home to a tiny house, and eating expired macaroni and cheese boxes. You’re picturing some recluses that never go out to socialize, grab dinner or beers, because it is “too expensive.” You’re picturing used cars (probably Toyota’s) and Sam’s club clothing. Well, this last part is spot on.
But for the most part, we don’t pinch pennies. We aren’t watching every dollar we spend. We aren’t always looking for a bargain. Yeah, we go on family vacations. We buy American Eagle jeans. We go out to eat (probably more than we should!). We drink with friends.
We don’t pinch pennies because that isn’t the EASY way to save money.
Cost cutting while eating more than cup-o-noodle
Most people have this whole impression that ramen noodle living is the only way to save money, and it must be done in pennies at a time. Sure if you find ways to cut small costs each day, that can certainly add up. But most spending happens in three VERY simple areas in your life.
The reality is, you don’t have to scour your finances or create some crazy budget spreadsheet to figure out where your money is going. It is really simple for most Americans. The things you spend the most money on after you pay your taxes are:
Go ahead. Tell me I’m wrong. Because you know I’m right. For example, let’s talk housing and the “right” amount to spend.
Housing: The biggest expense
There are a few ways that others will tell you are ideal methods to determine how much you should be spending on housing:
- Lenders will usually only give you a home loan if the monthly mortgage payment is less than or equal to 35% of your income — so you COULD use this as a metric to see what you can “afford”
- Financial institutions will recommend no more than 28% of your income be spent on rent/mortgage — and you should definitely try to stay under this
But if you really want to save money, you have to attack housing costs (and all costs) from the other direction. Ask yourself this simple question:
How can I minimize my housing cost?
The key is, there isn’t a “right” amount. Americans, especially middle classers like myself, are always telling each other what we “should” be doing or what is “right”. That’s all bullshit. It should never be a question of “what can I afford?” or “what is right?” If you ask that, you’re losing the saving game because this is a spending focused question rather than a savings focused one.
Don’t let ANYONE tell you what you should spend or what you can afford. Instead, figure out how to minimize your housing cost to create extra funds you can save. You don’t HAVE to get another job or side gig. Both spouses don’t HAVE to work, if you can minimize costs — starting with housing as the largest one — you can then invest that money!
I’m guilty of this…
Yep. I learned the hard way. But hell you learn a LOT more from mistakes and failures than you do from successes. I did what a lot of military service members do: I looked at the amount of “housing allowance” I got — just a way the military portions out your paycheck. Housing allowance varies with the cost of living for each area. So I looked at that and figured that was how much I SHOULD spend — how much I could AFFORD.
So. Stupid. I wasted a lot of money for the first 4 years of my career on housing when I could have rented a house larger than the townhome I rented for less than half the cost.
How dumb was I? Don’t answer that…
Housing choices = Dollar Signs
So if you found a way to live in a slightly smaller place or a slightly further away place, maybe you can get that for a mortgage of only 18% of your income. If you were spending 28% before, now you are effectively getting a 10% raise! If you were spending 35%, that’s a 17% raise! This will make it far easier to save half your income. Now take that money and invest it to create some passive, growing, income stream!
Our mortgage accounts for about 8% of our post-tax income. You can imagine how much easier this makes it for us to save money than if we’d spent closer to a third of our income.
One last note on housing: do a little homework so you don’t take on a ridiculous amount of risk like I did. I put my family in financial risk because of two reasons most people never consider before it gets them into big trouble and possible bankruptcy. I’ll write that article soon!
Vehicles: Be practical
First, some numbers:
- The average new car payment in the US is now about $500 a month
- The average term is now 68 months (5 years, 8 months)
- That comes out to about $30,000 per vehicle
Wow. It is easy to see how vehicles are most family’s second biggest expense. If you have payments on two new vehicles, OUCH. If you want to save half your income, cutting vehicle costs REALLY helps.
Coming from someone who had a large car payment out of college (I bought an SUV when I didn’t NEED one) and then went years without any payments at all, let me tell you this: there is hardly a better feeling than not having a loan payment each month. Thing of beauty.
But the reality is, that is tough to do, especially if you actually NEED a vehicle. For example, our family just got a little bigger. So we replaced our 12 year old Toyota Corolla for a 2015 Camry. Yep, used. We financed it, because the interest rate is still low enough to make sense and it helps our credit score.
Here are the keys to saving money on vehicle costs:
- Buy what you actually need
- Buy practical
- Buy used
Need vs. want
If you buy a Toyota Camry instead of an Infiniti or BMW sedan, right there you’ll save 30% or more. Plus, the mileage, reliability, and insurance will all be less costly. I’m not saying you shouldn’t buy an awesome car you want at some point. I WILL have a Porsche 911 one day.
But to do that I’m willing to accept practicality now to achieve abundance later.
Practicality
I can’t tell you how many people I know who have fancy $50,000 trucks that NEVER FREAKING USE THE BED of the truck. Seriously, though. If this is you, and you can’t figure out how to “afford” to save more money, then maybe you should take a moment to ponder your vehicle choice. Nothing says you can’t now sell that new truck and get a used SUV or sedan instead.
Buy vehicles that you actually use for the purpose they’re designed. Maybe commuting 30 miles in a fuel sucking V8 SUV or Camero isn’t the brightest of ideas — unless you are already wealthy. Buy reliable, fuel efficient vehicles designed for the task at hand and you’ll do just fine and save more money.
The Dirty Word of Car Buying: USED
I’ve had friends try SO hard to justify buying new. The big excuses, and my counterarguments, are:
- I don’t know the condition of a used car — if you buy an inspected vehicle, read the accident and ownership history, and buy a reliable brand, then you can be confident in the condition.
- The warranty is worth the cost for new — Again, buy a reliable car from a reliable brand and the risk is very low that you’ll have issues.
- I’m a good negotiator, I can get a really good deal — this is my favorite. A 3-year old car costs about 50% what it costs new (on average). How could that statistic be true if you were actually getting a “really good deal?” Exactly.
If you buy just a few years used, you still get newer amenities and safety features, but at a discount compared to vehicle new.
Our new-to-us 2015 Camry with 18,000 miles on it cost $10,000 less than a new one with the same features would have.
Of course the car dealerships won’t mention that you lose 11% of a new vehicle’s value when you drive it off the lot. Yeah, no thank you. And if your friends heckle you for buying used, explain how much you saved and how you are generating a passive income stream with that money. If they still don’t get it, send them here. And if that fails, well, you are the people you surround yourself with — choose wisely.
Lastly: my weakness… the cost of nom noms
Yep. Food, both restaurant costs and groceries, is generally the third biggest family expense. Now if you lean more towards groceries and cooking you can save a lot more than going out to eat.
I’m terrible at this category. We definitely like to restaurant dine, mostly because my wife and I both find cooking dinner to be a hassle. So we compromise by cooking breakfast (me) and bringing in lunch to work (wifey). And then we’d pick up food for half our dinners. Now that we have an infant at home, we are forced to eat in more, which is probably for the best!
This cost cutting really depends on how much you cook vs. go out. So if you replace some restaurant dining with cooking, you can find more income to keep and save! There are a ton of websites out there just about this topic, so I’ll leave that research up to you.
Everything is a freakin’ choice
Yes, we both work. Must make it twice as easy to save half our income. While certainly increasing your family’s total income from all sources SHOULD help with the availability of money to save, in reality most families simply inflate their standard of living to burn that income. Americans as a whole have become terrible at saving. There are far more dual-income and high income families that save at an unexceptional rate than ones that save like crazy. Don’t believe me? Read The Millionaire Next Door: the majority American millionaires and exceptional savers/investors are not doctors and lawyers, but rather blue collar and business owners.
Saving half our income is not a given by any means. It is 100% a choice. In fact, my wife was heavily considering separating from the Air Force and becoming a reservist to raise our family — which I would have completely respected. Of course, we would have also look at how we could downsize our standard of living in order to save more if that were the case. She decided to go back to work, understanding that she wanted to have a fulfilling Air Force career as well as have our family benefit from two incomes. Our dual income helps us to save the amount we want to save, retire early TOGETHER, and afford college for our kids. Saving half our income allows us to build the life we want for ourselves.
These are decisions you have to make as a family — and the easiest way to understand the best choices for you are to lay all the options out (crunch the numbers) and let everyone digest them. Only then will the impact of sourcing additional income or cutting costs be clear.
I’m shutting up, right after this last key to saving
ALL of this boils down to a two part concept, which is the foundation for my biggest money course. If you follow this formula, you will speed up your path to retirement, financial independence, or any other financial goal (like save half your income!):
- Spend less than you make
- Invest those leftover funds
Signing off,
Charlie
Originally published at reinvestinsuccess.com on May 29, 2018.
